banco santander totta, s.a
TRANSCRIPT
FOURTH SUPPLEMENT (dated 19 July 2010)
to the
BASE PROSPECTUS (dated 4 April 2008)
Banco Santander Totta, S.A. (incorporated with limited liability in Portugal)
€5,000,000,000
Covered Bonds Programme
This fourth Supplement dated 19 July 2010 (the “Supplement”) to the Base Prospectus dated 4
April 2008, as supplemented on 30 April 2008, 17 July 2008 and 17 July 2009 (the “Base
Prospectus”), constitutes a supplement to the Base Prospectus for the purposes of Articles 135-C,
142 and 238 of the Portuguese Securities Code prepared in connection with the Covered Bonds
Programme (the “Programme”) established by Banco Santander Totta, S.A. (the “Issuer”, fully
identified in the Base Prospectus). Terms defined in the Base Prospectus have the same meaning
when used in this Supplement.
Each of the Issuer, the members of its Board of Directors, the members of its Supervisory Board
(see Management and Statutory Bodies) and its Statutory Auditor (see Management and Statutory
Bodies) declares the same in respect of the information incorporated into the Base Prospectus
pursuant to this Supplement as declared in respect of the information contained in the Base
Prospectus.
This Supplement is supplemental to, and should be read in conjunction with, the Base Prospectus.
To the extent that there is any inconsistency between any statement in this Supplement and any
other statement in or incorporated by reference in the Base Prospectus, the statements in this
Supplement will prevail.
Save as disclosed in this Supplement, no other significant new factor, material mistake or
inaccuracy relating to information included in the Base Prospectus has arisen or been noted, as the
case may be, since the publication of the Base Prospectus.
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I. GENERAL AMENDMENTS
1. This Supplement dated 19 July 2010 shall be referred to together with the supplements
dated 30 April 2008, 17 July 2008 and 17 July 2009, and references to, and the definition
of, the Base Prospectus shall be amended accordingly.
2. References to the consolidated financial statements of BST as of and for the years
ended 31 December 2007 and 2008 shall be amended to 31 December 2008 and 2009,
respectively.
3. The following sentence shall be included at the end of the second paragraph on the
Cover Page, after the first sentence of the first paragraph of the General Description of
the Programme and as a third paragraph of the section headed “Programme Size” of
the Summary of the Covered Bonds Programme:
“Covered Bonds may be issued under the Programme up to 4 April 2018.”
4. The Dealer’s legal name “Bayerische Hypo- und Vereinsbank AG” shall be amended to
“UniCredit Bank AG” and ordered alphabetically.
5. Deutsche Bank Aktiengesellschaft is added, in alphabetical order, to the list and
definition of Dealers.
6. The following definitions shall be amended as follows:
““EUR”, “€” or “Euro” or “euro” means the lawful currency of Member States of
the European Union that adopt the currency introduced at the start of the third stage of
the European economic and monetary union pursuant to the Treaty.”
““USD” or “U.S. dollars” are to United States dollars, the lawful currency of the
United States of America, and to “£” or “GBP” or “pounds sterling” are to pounds
sterling, the lawful currency of the United Kingdom.”
““Treaty” means the treaty on the Functioning of the European Union, as amended
from time to time.”
II. COVER PAGE
7. The Dealers’ names “Merrill Lynch International” and “UniCredit Group (HVB)” shall
be amended to “BofA Merrill Lynch” and “UniCredit Bank” respectively, and such
Dealers’ names shall be ordered alphabetically.
8. “Deutsche Bank” shall be included as Dealer and ordered alphabetically.
III. RESPONSIBILITY STATEMENTS
9. The last paragraph shall be amended as follows:
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“In this Base Prospectus, unless otherwise specified or the context otherwise requires,
references to “EUR”, “€” or “euro” are to the lawful currency of the Member States
of the European Union that adopt the currency introduced at the start of the third stage
of the European economic and monetary union pursuant to the Treaty on the
Functioning of the European Union (as amended), to “U.S.$”, “USD” or “U.S.
dollars” are to United States dollars, the lawful currency of the United States of
America, and to “£” or “GBP” or “pounds sterling” are to pounds sterling, the lawful
currency of the United Kingdom.”
IV. RISK FACTORS
10. Before the heading “Banking Markets” the following paragraph shall be inserted:
“Where information has been sourced from a third party the Issuer confirms that, as
far as the Issuer is aware, it has accurately reproduced such information. The Issuer
accepts responsibility to the extent that no facts have been omitted which would render
the reproduced information inaccurate or misleading. The Issuer calculates its market
share data using official sources of information, governmental or otherwise (as
applicable). Where no official sources exist, the Issuer relies on its own estimates.”
11. The last sentence of the first paragraph under the heading “Banking Markets” shall be
amended as follows:
“The principal competitors of the Santander Totta Group in the banking sector
(ranking in terms of assets as of 31 December 2009) are Caixa Geral de Depósitos, the
Millennium BCP Group, the BES Group and the BPI Group.”
12. The section with the heading “Portuguese Economy” shall be replaced with a section
with the same heading as follows:
“After the stagnation reported the previous year, the Portuguese gross domestic
product (GDP) declined by 2.7 per cent. in 2009, as a result of the global economic
and financial crisis. This has been the sharpest decline in GDP since the 1970s.
The two variables which have most contributed to the recession in 2009 have been: (i)
the sharp decline in exports (more than 11 per cent. since 2008), reflecting the global
crisis and the decline in international trade; and (ii) the slowing down of investment
(down by more than 12 per cent. since 2008) as a consequence of the decline in
demand, the increased difficulties in the access to credit (both in relation to bank loans
and debt markets), and the increase of spreads.
Although the slowing down of exports was widespread, the trend of the decline was not
uniform throughout the year. The biggest decline in exports occurred during the early
months of the year, at the peak of the crisis, then there were some signs of recovery,
and finally the year ended at a lower level than in 2008. Sales to non-European
markets, such as Singapore and the USA, were the most affected, as a result of the
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insolvency process of Qimonda and the decline of oil prices. Although exports to
Angola have kept at a strong pace, they have not been able to offset the reduction of
sales to other markets.
The slowing down of investment followed the same annual trend as the decline in
exports, with the sharpest decline being recorded at the beginning of the year. During
the third quarter of 2009, the levels of investment increased (although it did not reach
2008 levels) as a result of public investments which preceded the national elections.
Although there was no similar situation during the last quarter of 2009, the recovery
trend continued until the end of the year.
Source: INE
Contributions to GDP Growth (YoY)
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09Private Consumption Government Consupt. Investment
Net Exports GDP
The recovery of investment was largely due to the increase of public consumption, the
government support initiatives and the automatic stabilisers.
For the first time since the 1993 recession, private consumption slowed down as well,
reflecting the household reaction to the increase of unemployment and a growing focus
on saving. Although the families of those employed benefited from an increase in real
wages, as a result of the decrease of consumer prices, the lower interest rates and the
reduction in energy prices, consumption was not stimulated.
The unemployment rate rose sharply during the year and ended 2009 at a level higher
than 10 per cent. (10.1 per cent. in the last quarter of 2009). The increase was most
significant after the summer, with several companies closing down (especially in those
sectors most exposed to the international crisis) and a decline in vacancies in the
tourism sector.
Household savings increased during the year. This increase was caused mainly by the
decline in interest rates to historically low levels and the consequent reduction of costs
incurred with mortgages. As a result, the savings rate rose from 5.7 per cent. in 2008 to
8.3 per cent. in the third quarter of 2009.
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Consumer prices fell 0.8 per cent. in 2009, mainly because of the lower prices of fuel
and food (as a consequence of the decrease of the prices of raw materials) and of the
various retail sales and discounts organised so as to confront the decline in demand.
The negative contribution of fuel prices to inflation peaked in June and reversed by the
end of the year.
Indicators for Portugal
2007 2008 2009
GDP 1.9 0.0 -2.7
Private Consumption 1.6 1.7 -0.8
Public Consumption 0.0 1.1 3.5
Investment 3.4 0.5 -12.6
Exports 7.8 -0.5 -11.6
Imports 6.1 2.7 -9.2
Inflation (average) 2.5 2.6 -0.8
Unemployment 8.0 7.5 9.5
Fiscal Balance (% GDP) -2.7 -2.7 -9.3
Public Debt (% GDP) 63.6 66.3 77.2
Current Account Balance (% GDP) -8.1 -10.5 -9.4
Source: INE, Banco de Portugal, Ministério das Finanças
The current and capital account deficit fell by 1 p.p. in 2009, as a consequence of the
significant decline in the trade deficit, the slowing down of domestic demand,
investment and private consumption; and the decline of the prices of energy and raw
materials during 2009.
However, this reduction in the current and capital account deficit had no perceptible
effect on the rate of deterioration of the international investment position, which rose
to 111.7 per cent. at the end of 2009, reflecting the decline of the nominal GDP.
In 2009 the budget deficit was at 9.3 per cent. of the GDP, with the public debt to GDP
ratio rising to 76.6 per cent.. These percentages were worse than the budget’s forecast,
although not as bad as the budget deficit of other countries in the Eurozone, such as
Greece or Spain.
Despite the decrease of interest rates, bank credit slowed down sharply, especially in
the individuals segment, with mortgage loans falling to their slowest rate of growth
since the 1980s, reflecting the sharp reduction of home purchases and the 30 per cent.
decrease in house construction.
The number of new loans granted to companies also decreased and was 26 per cent.
lower than in 2008. This figure would have risen further, if it were not for an increase
in demand at the end of 2008 and in the beginning of 2009, at the height of the crisis,
when uncertainty in relation to access to credit reached its zenith.
Despite the rise in household savings, customer resources grew only moderately during
the year. In the second half of 2009 there was an increase in the diversification of
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investments and a decrease in deposits, reflecting both the existence of lower interest
rates and a greater appreciation of the equity markets.
National banks continued redirecting their sources of funding, by reducing recourse to
the international money markets and increasing the volume of debt issues. As a result,
the liquidity gap of the system (the difference between loans & advances and balance-
sheet funds) fell to its lowest level since 2002.
Despite all of the above, the leverage of the economy has increased, since credit
continued to grow, while GDP felt in nominal terms and public debt grew at a higher
rate.
The quality of the loan portfolios deteriorated sharply in 2009, with the ratio of non-
performing loans reaching historic peaks, in particular in relation to consumer and
company loans. However, this deterioration of the ratios was mainly due to the
slowdown of the rate of growth of the total portfolio and there has been a decline in the
number of new non-performing loans.”
13. After the section with the heading “Adverse Changes in the Economic
Environment” two new sections with the heading “Main Risks and Uncertainties in
2010” and “The Portuguese Republic may be subject to a downgrade by rating
agencies, with implications for the financing of the economy” respectively shall be
inserted as follows:
“Main Risks and Uncertainties in 2010
There are various risks and uncertainties (both at international and at domestic levels)
that may have an impact on the business of the Santander Totta Group.
With regard to the global financial situation, the sustainability of the recent economic
upturn recorded towards the end of 2009 is questionable. Despite evidence of
improvement, market activity continues to be highly dependent on the stimulus
measures that were implemented throughout 2009 and on the recovery of the
employment market.
As a result of a seemingly healthier economic environment, national governments have
come under increasing pressure to remove such measures. There are further concerns
in relation to the impact of continued deterioration of public accounts on loan spreads
and the credit risk appraisal of sovereign issuers.
The recent increase of spreads in Greece, as well as in Portugal, Ireland and Spain,
has emphasised the need to control public expenditure, especially where the average
age of the national population is relatively high.
European central banks have chosen not to extend their current rescue operations,
which include quantitative easing and the injection of liquidity into European
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economies. Such operations will, however, continue to provide support where needed
for the immediate future.
On the basis of the above, the withdrawal of national stimulus measures and European
support operations may impede and stifle the recent signs of recovery of economic
activity.
A further risk remains with regard to the position of leading global financial groups, to
the extent that their balance sheets continue to be exposed to high-risk assets and their
loan portfolios are directly affected by market conditions and liquidity.
The continuing presence of such financial and credit risks may potentially affect the
ability of BST to access the international wholesale markets, either because of
increases in the cost of borrowing or the reduction of credit lines available to
Portuguese entities which have medium and long term financing requirements.
At a national level, the macroeconomic situation reveals a weak growth and a potential
divergence from the situation of the eurozone area. This has various implications for
the future activity of BST.
On the one hand, slow economic growth maintains high levels of unemployment and
therefore increases the risk of loan defaults. On the other hand, there is a risk that the
monetary policies applicable to Portugal, as defined for the eurozone area by the
European Monetary Union, would be out of step with national economic activity. An
increase of the refinancing rate could deteriorate the quality of Portuguese loan
portfolios.
The budget deficit and levels of foreign debt exemplify further the structural
imbalances of the Portuguese economy. This is reflected in the recent assessment (in
2009) by several rating agencies that the economic outlook for Portugal is "negative".
Such ratings profoundly affect the confidence of investors as to the quality of sovereign
debt.
The proposed measures for the regulation of the banking industry present further risk
to the business of BST. The majority of these measures are due to be enforced in the
middle of 2010 and impose restrictions as to the type and quality of capital required, as
well as to overall liquidity levels.
With regard to capital requirements, there have also been discussions as to the possible
introduction of measures to regulate credit growth by way of compliance with new
leverage ratios.
In relation to liquidity requirements, the proposed measures include a restrictive
definition of the "liquidity levels" for one week and one month liquidity horizons, with
only the following assets being considered eligible for this purpose: "eligible assets"
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for European Central Bank purposes, deposits covered by the Deposit Guarantee Fund
and debt issues with a maturity of over one year.
Finally, within the scope of the new Basel III regulatory framework, there are ongoing
discussions as to the possible creation of a liquidity ratio (the Bank of Portugal
implemented such ratio in 2000).
The Portuguese Republic may be subject to a downgrade by rating agencies, with
implications for the financing of the economy
“In April 2010 Standard & Poor’s downgraded the rating of the Republic of Portugal
to “A-” and in July 2010 Moody’s downgraded the rating of the Republic of Portugal
to “A1”. The rating agencies’ concerns were justified by the lack of significant and
credible measures to control the Portuguese budget deficit on behalf of the
Government, when public debt is approaching 100 per cent. of GDP and by the lack of
consensus between the Government and the opposition on measures to be implemented
for public finance consolidation in order to achieve the necessary convergence with
countries of similar rating. The rating agencies’ outlook on the Republic of Portugal is
dependent on the measures included in the Stability and Growth Programme and on
the feasibility and credibility of the plan to reduce the public deficit to 3 per cent. of the
GDP by 2013. In the past, downgrades of the rating of the Republic of Portugal have
led to the rating downgrade of Banco Santander Totta, S.A. and it is most likely that
the evolution of Banco Santander Totta, S.A.’s rating continues to be affected by the
sovereign rating of its home country and by the developments in the domestic economy.
The rating of the Republic of Portugal may be downgraded again in the future in the
event of a more drastic deterioration in public finances resulting from poorer
performance in economic activity or from the measures proposed by the Government
being perceived as insufficient. Accordingly, an adverse impact on the Republic of
Portugal may result in negative side effects on Portuguese banks and companies in
general and hence on their financial results.
Information on the ratings granted to the Issuer are available on the CMVM’s website
(www.cmvm.pt), under the section Material Information through the following link:
http://web3.cmvm.pt/english/sdi2004/emitentes/emit_fact.cfm?num_ent=%23%224W
%5D%0A.”
14. The fourth paragraph under the heading “Regulation” shall be replaced with the
following:
“Portuguese banks are required to maintain a solvency ratio of at least 8.0 per cent..
The solvency ratio is defined as Tier I capital plus Tier II capital divided by risk-
weighted assets. The Bank of Portugal minimum requirement for Tier I capital is 4 per
cent.. The solvency ratio of the Santander Totta Group complies with the Bank of
Portugal rules and in accordance with the Basel II regulatory framework and the
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application of: (i) the internal notations method (advanced by IRB) for calculating the
equity requirements in relation to substantial part of the relevant loan portfolio; (ii) the
standard method for calculating market risk; and (iii) the basic indicator method for
calculating the equity requirements in relation to operational risk, Tier I Capital and
Core Capital of BST rose, as of 31 December 2009, to 9.1 per cent. and 7.6 per cent.
respectively (to include profit gained in 2009). This demonstrates the solid and solvent
nature of the BST balance sheet. The capital adequacy requirements applicable to BST
limit its ability to advance loans to customers and may require it to issue additional
equity capital or subordinated debt in the future, which are expensive sources of funds.
As far as the required minimum level of own funds is concerned, the Bank of Portugal
has generally recommended that, no later than the end of September 2009, credit
institutions shall have a minimum Tier 1 capital level of 8 per cent.. Furthermore, in
accordance with Law 63-A/2008 of 24 November 2008 - referring to the reinforcement
of financial stability of credit institutions, namely to capitalisation measures through
public investment - the Portuguese Government may, by ministerial order, define the
level of own funds of credit institutions in such a capitalisation context; BST does not
foresee that it will be necessary to recapitalise with the aid of the Portuguese
government.”
15. The sections with the heading “Balance sheet and activity” and “Financial crisis
impact in the Issuer’s activity” shall be replaced with a section with the heading
“Balance sheet, Income Statement and activity” as follows:
“As at 31 December 2009, the turnover of BST amounted to €56.1 billion, (an increase
of 1.2 per cent. in comparison with the previous year), as a result of credit (which
includes guarantees) totalling €31.7 billion (representing a decrease of 0.9 per cent. in
comparison with the previous year) and of customer resources totalling €24.4 billion
(representing an increase of 4 per cent. in comparison with the previous year).
10
million euro 2009 2008 Change
Business Volume 56 097 55 457 +1.2%
Total Gross Loans (includes guarantees) 31 737 32 038 -0.9%
Gross Loans (1)
30 010 30 424 -1.4%
of which
Loans to Corporates 11 087 11 852 -6.5%
SME/Small Business 3 095 2 769 +11.8%
Corporates 4 530 4 523 +0.1%
SME/Small Business+Corporates 7 625 7 292 +4.6%
Large Corporates 3 462 4 561 -24.1%
Loans to Individuals 18 289 17 929 +2.0%
of which
Mortgage Loans (including securitization) 16 236 15 983 +1.6%
Consumer Loans 1 638 1 522 +7.6%
Customers' Resources 24 361 23 419 +4.0%
On-Balance Sheet Resources 16 059 16 593 -3.2%
Deposits 15 281 15 525 -1.6%
Securities issued 778 1 068 -27.1%
Off-Balance Sheet Resources 8 302 6 826 +21.6%
Investment Funds 3 582 2 498 +43.4%
Insurance and Other Resources 4 719 4 328 +9.0%
(1) Includes securitization, commercial paper and guarantees
As at the end of 2009, the loan portfolio (including guarantees) totalled €31.7 billion,
showing a small decrease compared to the previous year (less 0.9 per cent.), as a result
of the important performance of the Large Companies loan portfolio in the context of
greater demand for credit.
As a consequence of pursuing a selective policy of offering credit to economically
viable companies, the total amount of credit offered by BST to businesses and medium-
sized enterprises has increased by 4.6 per cent.. This is a result of the contributions
made by several state-supported financing programmes (for example, the SME Invest
programme).
The performance of the Large Companies loan portfolio has been directly influenced
by the development of spread margins. In the present environment, this has resulted in
an increased disintermediation within this segment.
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The amount of credit offered to individual borrowers totalled €18.3 billion, (an
increase of 2 per cent. in comparison with the previous year), as a result of declining
growth in the residential loan market. The amount of mortgage loans made by BST
totalled €16.2 billion (an increase of 1.6 per cent. in comparison with the previous
year), and reflects the downturn of the Portuguese property market, as well as the
decreased purchasing power of individuals. There was, however, a remarkable
improvement in the volume of production during the second half of 2009.
The performance of the consumer credit portfolios was more dynamic and increased
7.6 per cent. in comparison with the previous year.
The loan portfolio quality indicators reflect an increase (from 0.78 per cent. to 1.21
per cent.) in the number of loans in default for more than 90 days. Once again, this
figure is a direct result of decreased economic growth and a rise in unemployment
levels, and, despite current market conditions, it remains below the industry average.
The non performing loans coverage ratio (by more than 90 days) stood at 124.8 per
cent..
2009 2008 Change
Non Performing Loans Ratio 1.30% 0.87% +0.43 p.p.
Non Performing Loans Ratio (+90 days) 1.21% 0.78% +0.43 p.p.
Non Performing Loans and Doubtful Loans Ratio 1.23% 0.78% +0.45 p.p.
Non Performing Loans Coverage Ratio 116.4% 156.1% -39.6 p.p.
Non Performing Loans Coverage Ratio (+90 days) 124.8% 175.5% -50.7 p.p.
NPL and Doubtful Loans Coverage Ratio 122.6% 173.9% -51.3 p.p.
As of 31 December 2009, customer resources totalled €24.4 billion, (an increase of 4
per cent. in comparison with the previous year). This figure is underpinned by a 43.4
per cent. increase in investment funds and by a 9.0 per cent. increase in capitalisation
Including securitization and guarantees
Loans* (billion euro)
17.9 18.3
11.9 11.1
2008 2009
Other Corporates Individuals 31.7 32.0
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insurance, both of which began their recovery as at the end of the first quarter of 2009.
In contrast, the total amount of term deposits fell by 1.6 per cent., reflecting the
considerable pressure on liquidity levels.
The following is the Issuer’s income statement as of 31 December 2009:
million euro 2009 2008 Change
Net Interest Income (without Dividends) 761.8 705.8 +7.9%
Dividends 5.0 5.9 -14.2%
Net Interest Income 766.9 711.6 +7.8%
Fees and Other Income 311.8 307.8 +1.3%
Commercial Revenue 1 078.7 1 019.4 +5.8%
Gain/Losses on Financial Transactions 71.4 50.7 +40.8%
Operating Income 1 150.1 1 070.1 +7.5%
Operating Costs (521.5) (498.3) +4.7%
Personnel Expenses (302.3) (283.2) +6.7%
Other Administrative Expenses (154.7) (151.8) +1.9%
Depreciation (64.5) (63.3) +1.9%
Net Operating Income 628.6 571.9 +9.9%
Impairment and Other Provisions (61.9) (43.3) +42.9%
Income Before Taxes and MI 566.7 528.6 +7.2%
Taxes (87.1) (90.1) -3.4%
Minority Interests (6.7) (0.0) >+200,0%#DIV/0!
Net Income 473.0 438.4 +7.9%
* Includes the reclasification of the gain with the sale of Angola (28,1 M€) in 2009 and gains with loan sells
(1,5 M€ in 2008 and 4,3 M€ in 2009) from gains from financial operations to impairment and other provisions and results
”
BST achieved a consolidated net income of €473.0 million at the end of 2009, a 7.9 per
cent. increase from the net income of €438.4 million recorded at the end of 2008.
This increase in net income has resulted largely from the performance of strict net
interest income, of net commissions and other banking income, and financial
Customers Resources (billion euro)
16,6 16,1
6,8 8,3
2008 2009
Off Balance Sheet On Balance Sheet
24,4 23,4
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transactions which increased by 7.9 per cent., 1.3 per cent. and 40.8 per cent.,
respectively. The performance of these headings caused operating income to increase
overall by 7.5 per cent. from 2008. On the other hand, operating costs rose by 4.7 per
cent., in comparison with the costs incurred in 2008. Given that the growth of
operating income was greater than the increase in operating costs, the net operating
profit increased by 9.9 per cent. from 2008. Provisions were made so as to maintain an
adequate level of protection for loan portfolios and advances made to customers, as
well as in relation to other contingencies, thus absorbing a part of the gain achieved as
a result of the reduction of the holding in Angola.
Net interest income (without dividends), as the main source of income, rose to €761.8
million, an increase of 7.9 per cent. from the net interest income of €705.8 million
recorded in 2008. This was the result of prudent spread management and policy in
relation to volume of business, and, at the same time, maintaining adequate cover with
regard to net interest income sensitivity and a comfortable liquidity position, against a
background of rising funding costs, a continuation of interest rates at historically low
levels and a sharp deceleration in the growth of credit.
Net commissions and other banking income increased by 1.3 per cent. to €311.8
million in 2009, in comparison with the figure of €307.8 million for 2008. This is a
result of the increase in the aggregate of fees payable for services, payment means,
credit, risk insurance and investment banking, which has offset the reduction in fees
associated with investment funds, financial insurance and mortgage loans as a result
of the decline in the volume of marketing of these products.
Net income arising from the performance of financial transactions totaled €71.4
million, comparing favourably with the figure of €50.7 million recorded in 2008, which
represents an increase of 40.8 per cent. and accounts for 6 per cent. of the BST's
income. Transactions conducted with major customers and in relation to project
finance performed well, offsetting the decrease in sales of derivative products to retail
customers, conditioned further by low interest rates.
In 2009, BST recorded an overall operating income of €1,150.1 million, which
represents a sustained and balanced growth of 7.5 per cent., achieved against a
macroeconomic background of recession and with a moderate increase of the business.
Operating costs in 2009 totaled €521.5 million, which represents an increase of 4.7 per
cent. in comparison with the costs incurred in 2008. This increase is largely related to
the growth in staff costs, as a result of the book difference between the expected return
on the pension fund and its discounted rate. If it were not for this discrepancy,
operating costs would have increased by only 3.1 per cent.. The 1.9 per cent. increase
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in the depreciation charge is directly linked to the non-recurring costs related to the
investment in the Parthenon IT platform.”
16. The paragraph under the heading “Risks associated with the implementation of its
risk management policies” shall be amended by replacing “The Santander Totta
Group” at the beginning of the first sentence with “BST”.
17. The third paragraph under the heading “Credit Risk” shall be replaced with the
following:
“In 2009, overdue loans (defaults longer than 90 days) represented 1.21 per cent. of
the total credit portfolio and the overdue loans coverage ratio stood at 124.8 per cent.
as at 31 December 2009. The Issuer cannot assure potential investors that its level of
provisions and other reserves will be adequate or that the Issuer will not have to take
significant additional provisions for possible impairment losses in future periods.”
18. The first sentence of the fourth paragraph under the heading “Other factors that may
affect the Issuer’s ability to fulfil its obligations under the Covered Bonds” shall be
amended as follows:
“Mortgage lending represented around 54 per cent. of the credit portfolio in 2009.”
19. The section with the heading “EU Savings Directive” shall be replaced with a section
with the same heading as follows:
Under Council Directive 2003/48/EC, of 3 June 2003, on taxation of savings income in
the form of interest payments (the “Directive”), Member States are required to provide
to the tax authorities of another Member State details of payments of interest (or
similar income) paid by a person within its jurisdiction to an individual resident in that
other Member State of the EU or to certain limited types of entities established in that
other Member State of the EU. However, for a transitional period, Luxembourg and
Austria are instead required (unless during that period they elect otherwise) to operate
a withholding system in relation to such payments (the ending of such transitional
period being dependent upon the conclusion of certain other agreements relating to
information exchange with certain other countries). A number of non-EU countries
and territories, including Switzerland, have adopted similar measures (a withholding
system in the case of Switzerland). On 15 September 2008 the European Commission
issued a report to the Council of the European Union on the operation of the Directive,
which included the Commission’s advice on the need for changes to the Directive. On
13 November 2008 the European Commission published a more detailed proposal for
amendments to the Directive, which included a number of suggested changes. The
European Parliament approved an amended version of this proposal on 24 April 2009.
If any of the proposed changes are made in relation to the Directive they may amend or
broaden the scope of the requirements described above. If a payment were to be made
or collected through an EU Member State which has opted for a withholding system
15
and an amount of, or in respect of, tax were to be withheld from that payment, neither
the Issuer nor any Paying Agent nor any other person would be obliged to pay
additional amounts with respect to any Covered Bond as a result of the imposition of
such withholding tax. The Issuer is required to maintain a Paying Agent in an EU
Member State that is not obliged to withhold or deduct tax pursuant to the Directive.
V. DOCUMENTS INCORPORATED BY REFERENCE
20. The section referring to the audited consolidated financial statements of the Issuer in
respect of the financial year ended 31 December 2007 shall be deleted.
21. The section referring to the audited consolidated financial statements of the Issuer in
respect of the financial year ended 31 December 2008 shall be listed under (a).
22. The following shall be included as the new section (b):
(b) the audited consolidated financial statements of the Issuer in respect of the
financial year ended 31 December 2009, together with the auditors’ reports
prepared in connection therewith (available at www.santandertotta.com and at
www.cmvm.pt), including the information set out at the following pages in
particular:
Consolidated financial statements (prepared in
accordance with IFRS) for the year ended 31
December 2009
Pages 63 to 67 (out of 184)
Consolidated Statement of Income Page 64 (out of 184)
Consolidated Statements of comprehensive income
for the year ended 31 December 2009
Consolidated Balance Sheet
Page 65 (out of 184)
Page 63 (out of 184)
Consolidated statement of cash flow Page 67 (out of 184)
Statement of changes in consolidated
shareholder’s equity
Page 66 (out of 184)
Notes to the financial statements Page 68 to 181 (out of 184)
Legal Certification of Accounts and Auditors’
Report
Page 182 to 184 (out of 184)
VI. TERMS AND CONDITIONS OF THE COVERED BONDS
23. Condition 5.6 (i) shall be replaced with the following:
16
“a day on which commercial banks and foreign exchange markets settle payments and
are open for general business (including dealing in foreign exchange and foreign
currency deposits) in:
(A) the relevant place of presentation; or
(B) any Additional Financial Centre specified in the applicable Final Terms; and”
VII. DESCRIPTION OF THE ISSUER
24. The entire section shall be replaced with the following:
(as attached)
17
“DESCRIPTION OF THE ISSUER
Incorporation and Registered Office
Banco Santander Totta, S.A. (the “Issuer” or “BST”) is a limited liability company (sociedade
anónima) registered and incorporated in Portugal on 19 December 2004 (registered number and
corporate identification number 500 844 321) under the laws of Portugal, having its registered
office at Rua Áurea, no. 88, 1100-063 Lisbon, Portugal (with, telephone number +351 21
3262031). The Issuer is a credit institution whose activities are governed, inter alia, by the
Portuguese Credit Institutions’ General Regime (Decree-law 298/92, of 31 December, as amended
from time to time), the Portuguese Securities Code (Decree-law 486/99, of 13 November, as
amended from time to time) and the Portuguese Companies Code (Decree-law 262/86, of 2
September, as amended from time to time). The Issuer has a fully-paid up share capital of EUR
620,104,983.
Information from third parties
Where information has been sourced from a third party the Issuer confirms that, as far as the
Issuer is aware, it has accurately reproduced such information. The Issuer accepts responsibility
to the extent that no facts have been omitted which would render the reproduced information
inaccurate or misleading.
The Issuer calculates its market share data using official sources of information, governmental or
otherwise (as applicable). Where no official sources exist, the Issuer relies on its own estimates.
Business overview
The Issuer’s commercial banking business is managed through its retail network. The investment
banking business of BST, formerly managed through Banco Santander de Negócios Portugal, S.A.
(“BSN”), is now directly managed by BST, following the merger by incorporation of BSN into
BST in May 2010. The specialised credit (including leasing, factoring and consumer credit) and
investment funds management business is managed by operating companies indirectly owned by
Santander Totta, SGPS, S.A. BST’s retail network regularly distributes Santander’s products. The
strategy of Santander is to position BST as a full service bank offering clients a full range of
banking products.
The commercial banking business is sub-divided into four core business areas:
(i) individuals and self-employed;
(ii) small and medium-sized businesses;
(iii) corporate and institutional customers; and
(iv) high net worth individuals.
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Distribution channels
BST has an extensive and integrated network of distribution channels.
Branches
At the end of 2009, following BST’s three year programme of expansion, the total number of
branches increased to 762 customers’ assistance offices (Postos de Atendimento), 698 of which
are branches. This number includes 14 premium centres, five in Lisbon, two in Porto and one in
each of Estoril, Leiria, Coimbra, Viseu, Braga, Maia and Matosinhos, specially designated for
premium clients.
BST’s strategy for leading the university sector continued throughout 2009, where BST maintained
its presence with 28 university branches in the domestic market.
In addition to the network of traditional branches, BST increased its promotional stores in
suburban areas to 200 by virtue of the Promoting Offices programme (Lojas Promotores).
Electronic/Complementary Channels
In 2009, the selfbanking activity focused on the renegotiation of the already existing ATM network
installed at BST client premises and on installing new ATM machines in places with a high volume
usage potential.
BST had an 11.8 per cent. market share in the ATM market, including ATM machines installed at
its branches and with its clients. The internal network of machinery responsible for making
deposits and cashing cheques was increased from the previous year, surpassing the 500 existing
machines installed and corresponding to a coverage of over 60 per cent. of branches of the BST
commercial network. Outsourcing was increasingly used by the selfbanking activity, evidencing
BST’s clear commitment to this distribution channel.
In 2009, the NetBanco Individuals and Corporate segment functionalities were improved. Within
the Individuals segment, dispatch procedures for notices were enhanced, digital credit card
extracts and new campaigns for personalised messages for credit concessions were launched while
public areas within the branches network were redesigned. BST also enhanced its standards under
the European Directives plan and in particular the Directive 2004/39/EC (“MiFID”) rules. In the
Corporate segment a new anti-fraud system for the signing of operations was developed, each user
now being able to choose between using a dynamic code provided by a matrix card, or an
authorisation code sent to the client’s mobile phone.
In 2009 there was an increase of 11 per cent. in the NetBanco Individuals and Corporate
segments. The share of migrated transactions in the Individuals segment was approximately 70 per
cent., evidencing a 13 per cent. increase during the course of 2009. The number of visits to the
NetBanco website also increased by 17 per cent. in 2009.
International
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On an international level, BST sought to increase proximity with its clients in order to highlight
the strength of the BST Group’s balance sheet, and to consolidate and innovate its offer of banking
solutions to clients resident abroad, despite the difficult economic environment.
The banking solutions offered to clients during 2009 included the Super Account for Residents
Abroad (Super Conta Residentes no Estrangeiro), and saving products for the most significant
currencies. BST also provided a number of advantages in terms of pricing and a variety of
applications.
The offer of diversified products included financial and investment insurance products and
structured products in dollars, with an expected higher return compared to the standard return of
the market.
BST hosted events abroad, notably in South Africa and Venezuela, with the purpose of presenting
on existing business opportunities within certain segments of the Portuguese economy and
commenting on the performance of the Santander Totta Group, so as to improve the confidence of
local Portuguese communities.
There were also initiatives such as a "Summer Campaign", directed at customers living and
working abroad. During the “Summer Campaign” initiative, BST employed communication
resources and assistants to better attend to client needs.
During the second half of 2009, the Luxembourg branch was successfully closed with due regard
to the best interests of the clients, as well as to the relevant local authority rules.
The London branch continued to focus on credit solutions for UK and Irish residents seeking to
acquire a second residence in Portugal. At the same time, the London branch introduced better
control mechanisms in relation to credit portfolios.
In 2009, the volume of business grew by 4.2 per cent. in the Non-Residents segment, with a notable
improvement within the last quarter. In an effort to promote a strong relationship between clients,
local offices and branches, Portuguese commercial directors organised 39 visits to Portuguese
regions with high rates of immigration, in order to offer the most adequate banking solutions.
The operating income of the Non-Residents segment showed a steady increase, although it
remained below growth rates in the past years. During 2009, the credit granted to clients in this
segment increased by 10.9 per cent..
In 2009, BST maintained its market share in the Portuguese Emigrants’ Transfers segment. This
was as a result of an important effort by the Bank to inform its clients of the most efficient way to
execute these transactions. Also in 2009, BST created a specific site for the Non-Residents segment
named Portuguese Abroad, (Portugueses no Estrangeiro) which is linked to the BST webpage.
Outlook for 2010
20
Economic indicators during the last quarter of 2009 have suggested that 2010 will be a year of
recovery for the Portuguese economy. However, some analysts have reported that such recovery
might take longer than expected and there is some uncertainty as to its sustainability.
BST is prepared to face the difficulties and challenges of 2010, which will include lower business
growth levels, higher funding costs, increased levels of impairment and provisions relating to
increased default ratios.
BST has a solid and well-provisioned balance sheet as well as no capital or liquidity restrictions.
The BST Group will maintain its strategy of focusing its commercial banking model on client needs
and making careful choices with respect to such needs.
Net operating margins, cost control, and the dynamic management of global banking risks and
portfolio credit quality will all continue to be the fundamental focus for 2010.
BST will continue to grow due to its corporate brand and operational efficiency, thereby
maintaining its support for the Portuguese business sector. In the Individuals segment, BST will
focus on the consolidation of its market position within specific sectors, such as the university and
premium sectors.
Operations
Commercial Banking
Throughout 2009, BST continued its client-centred strategy, employing its dynamic commercial
activity in a manner that would allow the BST Group to attract and retain resources, manage
credit spreads, control credit defaults and increase the success of the Corporate segment.
Furthermore, BST launched two client campaigns in order to consolidate this commercial banking
strategy. The first client campaign was held in April and entitled "I Need a Zero", while the second
campaign was held in October and entitled "Ordenados Dá". Both campaigns highlighted the
advantages of the Super Payroll Account (Super Conta Ordenado).
These campaigns were set up for potential clients to open future payroll accounts with BST,
offering technological equipment, exemption from commission, and 0 per cent. interest rate on
overdraft utilised during the first year.
It’s important to note that, during the last quarter of 2009, BST launched a commercial banking
synergy programme in order to motivate the retail professional teams and to improve their
performance in the following areas: clients’ resources, mortgage loans, consumer loans, factoring,
confirming and new payroll accounts.
Over the course of 2009, the volume of business in the Individuals and Business segments
increased by 3 per cent..
Credit risk
21
Principal areas of activity
During 2009, the activity of the credit risks area was mainly directed at the following:
Maintaining the segmentation principle in processing credit risks, differentiating the approach to
such risks in light of the characteristics of customers and products;
• Increasing the quality of risk-admission analysis instruments, suited to and differentiated in
light of each segment, allowing for an increase in the quality of admission and follow-up of
such risks, with a consequent improvement in the quality of loan portfolios;
• Strengthening of commercial areas with a view to growth of the business and strict
observance of the Group's risk-admission criteria, allowing for the control of default levels
and the consequent continuation of healthy loan portfolios;
• In respect of portfolio customers (those assigned a credit analyst), the number of pre-
classified customers was increased and greater support was given to the commercial area in
attracting new customers;
• In respect of individual customers and standardised risks, greater use was made of the Triad
comportmental scoring model. This instrument is of a more predictive nature as to the risks
assumed, simultaneously allowing for: more proactive intervention in respect of customers,
driving the growth of the business, the increase of quality and the preservation of portfolio
quality;
• In respect of standardised risks in the Businesses segment, a new automatic transactions-
decision system came into operation, impacting not only on the quality and cost of customer
service, but also on the consistence and coherence of the service quality of the credit risks
area;
• As a result of the quality of risks admitted and of instruments used, insofar as Basel Capital
Accord (“BIS II”) is concerned, BST obtained authorization from the Bank of Portugal and
the Bank of Spain to use, as from 30 June 2009, advanced internal (IRB advanced) models in
processing the credit risk of the majority of its portfolios (approximately 90 per cent.);
• As a result, particular attention continued to be focussed on the control of past-due loans,
with an increase in the quality of management information so as to allow for a more
proactive role in the identification of problems and the search for solutions. The focus was on
ongoing monitoring of portfolios by specialised teams and on the promotion of new products,
with a view to the settlement of debts, so as to reduce the amount of non-performing loans
and management delays, and to preserve the quality of the loan portfolios in question;
22
• In the recoveries area, there was a greater focus on the management of irregular assets, with
a strengthening of the restructuring agreements policy and obtaining payments in kind, rather
than going through legal proceedings.
Risk Model
Credit risk is the possibility of losses stemming from full or partial non-fulfilment of financial
obligations entered into with the Bank by its customers.
The organisation of credit-risk management is dependent on the type of customer in question, with
a different approach adopted, throughout the whole of the risk management process, for portfolio
customers and for standard customers.
• Portfolio customers are those who because of the risks assumed, are assigned a risk
analyst. This group includes Corporate Banking customer companies, financial institutions
and part of the Retail Banking customer companies. Assessment of these risks is undertaken
by the risk analyst, complemented by decision-support tools based on internal risk
assessment models.
• Standard customers are those who are not assigned an analyst to monitor them specifically.
This group includes individuals, one-man businesses and non-portfolio Retail Banking
companies. Assessment of these risks is based on internal assessment and automatic-
decision models, complemented, in a subsidiary manner when the model is not sufficiently
precise, by teams specialised in risks of this type.
Metrics and measurement tools
BST uses it own solvency classification assignment models or internal ratings for the various
customer segments. These are used to measure the creditworthiness of a customer or transaction,
each rating corresponding to a different probability of default.
The overall classification tools are applied to the country-risk, financial entities and Global
Corporate banking segments, both to determine their rating and also in monitoring the risks
assumed.
These tools assign a rating to each customer as a result of a quantitative or automatic module
based on balance sheet data and/or ratios or macroeconomic variables, complemented by an
analysis performed manually by the risk analyst monitoring the customer.
The ratings are reviewed periodically to incorporate new financial information becoming
available in the meantime and also, at a qualitative level, the experience acquired through the
assessment of the existing credit relationship. The frequency of these reviews increases for those
customers if the internal warning and risk-classification systems so require.
It should be pointed out that the decision-support tools are themselves subject to review and/or
performance evaluation.
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For the standard-risk portfolios, both of individuals and of non-portfolio businesses, scoring tools
have been implemented that automatically assign a score or decision to loan applications
received. These standard-risk decision tools are complemented by a comportmental scoring model,
an instrument that brings greater predictability as to the risks assumed, which are used both for
pre-sales and for sales.
Credit-risk parameters
Assessment of the customer and/or of the transaction through rating or scoring constitutes an
evaluation of their creditworthiness, which is quantified through the probability of default (“PD”).
In addition to the appraisal of the customer, quantitative analysis of the risk considers other
aspects, such as the life of the transaction, the type of product and the guarantees that exist.
Therefore, not only is the probability of the customer defaulting on his contractual obligations
(PD) taken into account, but an estimate is also made of the moment of exposure at default
(“EAD”) and the percentage of EAD that cannot be recovered (loss given default or LGD).
These are the principal parameters of the credit risk. Their combination allows a calculation of the
probable or expected loss, which is considered as yet another business cost reflecting the risk
premium, a cost that is appropriately reflected in the price of the transactions.
It is these risk parameters that allow a calculation to be made of the regulatory capital in keeping
with the BIS II. Indeed, this regulatory capital is determined be the difference between the
unexpected loss and the expected loss.
The estimate of the risk parameters (PD, LGD and EAD) is based on: in-house experience, the
analysis of contracted transactions, observation of defaults and the experience in recovering the
main defaults encountered.
Calculation of the LGD is based on observation of the process of recovery in non-performing
loans, not only the income and costs associated with such process, but also the moment in which
they occur and the indirect costs stemming from recovery activity.
The EAD is estimated on the basis of a comparison between the use of the contracted lines at the
time of default and a normal situation, so as to determine the real consumption of the lines at the
time of default.
Rating Scale
To establish an equivalence between the internal ratings of the various models that exist –
corporate. country-risk, financial institutions, etc. – and to allow their comparison with the
external ratings assigned by the international agencies, the Bank uses an equivalence table.
The equivalence is established through the probability of default associated with each rating.
Probabilities calibrated internally are compared with the external ratings periodically published
by the rating agencies.
24
Real loss
To complement the use of the advanced methods described above, other metrics are usually used,
allowing prudent, effective management of the credit risk on the basis of losses occurring.
At BST the cost of the credit risk is measured, above all, through the default management
variation, known as VMG (final doubtful - initial doubtful + write-offs - write-offs recovered).
These three approaches measure the same situation and therefore converge in the medium- to
long-term, even though they represent successive moments of the cost of credit: default flows
(VMG), cover of doubtful debt and cover of bad debt respectively.
Credit-risk cycle
The risk-management process consists of identifying, measuring, analysing, controlling,
negotiating and decision-taking in respect of the risks incurred by the Bank's operations. This
process starts with the business areas that propose a given risk propensity. These risks are
approved, or not, by special committees, which act by delegation of powers by the Executive
Committee on the Senior Credit Board (“CSC”).
The CSC establishes the risk policies and procedures and establishes the limits and delegation of
powers.
Planning and establishing limits
The establishment of risk limits is conceived as a dynamic process that identifies the profile of
those risks the Bank is prepared to accept, through appraisal of the loan applications and of the
opinion of the credit risks area.
The limits are based on two basic structures: the customers and/or segments and the products.
For major corporate groups a pre-classification model is used, based on a system of economic-
capital measurement and follow-up.
At the level of portfolio-customer risks, the most basic level is the customer. Where certain
characteristics are involved – generally of relative importance – there is an individual limit,
usually known as pre-classification, normally involving a simpler system for those customers that
meet certain requirements (well known to the Bank, ratings, etc.).
For the standard risks, the process of planning and establishing limits involves joint preparation
by the risks and business areas of credit management programmes (PGC) reflecting the expected
results of the deal in terms of risk and returns as well as the limits to which the activity and the
associated risk management will be subject.
Risk study and loan classification process
25
A requirement prior to the authorisation of any transaction at BST is the performance of a study of
the risk.
This study consists of analysing the ability of the customer to fulfil its contractual commitments
towards the Bank. This implies an analysis of customers' creditworthiness, their loan transactions,
their solvency and their profitability.
The risk study is performed for each new customer or transaction, its frequency predetermined in
the light of the segment in question.
Additionally, a study is also performed and the assigned rating is reviewed in the event of an alert
or event affecting the customer and/or the transaction.
Operations Decision
The decision process involved in the transactions is aimed at their analysis and decision, taking
into account the risk profile and the relevant elements of the transaction in the definition of a
balance between risk and return.
Follow up and Control
To maintain adequate control of the quality of the loan portfolio, and in addition to the measures
undertaken by Internal Audit, a specific follow-up process has been set up, involving special teams
and managers.
This follow-up procedure is fundamentally based on an ongoing process of observation allowing
advance detection of incidents that might occur in the in the evolution of the risk, of the
transactions and of the customer, to be able to implement in advance measures designed to
mitigate them.
Recoveries
Recovery management at BST is a strategic, integral and business activity. The specific goals of
the recovery process are as follows:
• To obtain payment or settlement of outstanding balances of payments to ensure that the
situation returns to normal. Should this not be possible, the aim is to recover the debts in
full or in part, no matter what their situation is at the time;
• To maintain and strengthen the relationship with the customer, ensuring the customer's
proper conduct in the light of commitments contractually entered into with the Bank.
Recovery activity also differs in accordance with the commercial segments in question: standard
customers and portfolio customers, each with their own specific management model. Recovery
management, segmented in this way, determines the various management stages: preventative
management, irregularities management, doubtful debt and bad-debt management, which have
26
their own specific models, strategies and circuits. All this activity is shared with the business
areas.
Counterparty risk
Counterparty risk refers to the possibility of default by a counterparty of terms agreed within
contracts executed on the financial markets, such as the organised markets or the over-the-counter
market (“OTC”), and the subsequent financial losses incurred by the non-defaulting party.
The relevant types of transactions include the purchase and sale of securities, interbank money
market operations, repos contracting, securities borrowing and derivative instruments.
The control of these risks is carried out through an integrated system, to enable the recording of
approved limits and to provide information on the availability of different products and maturities.
The same system also allows for the monitoring of risk concentration at the customer/counterparty
level.
The risk in derivatives transactions, called Credit Risk Equivalent (“CRE”), is calculated as the
sum of the current value of each contract (or current replacement cost) and the respective
potential risk. This provides an estimate of the maximum expected value until maturity, subject to
underlying market volatility and contracted flow structure.
Market risk
Activities subject to market risk
The financial risk measurement, control and monitoring segment includes those operations in which
an asset risk is assumed. The risk stems from the variation of risk factors, interest-rate, exchange-
rate, floating-rate and their volatility as well as the solvency risk and the liquidity risk of the
various products and markets in which BST operates.
In light of the purpose of the risk, the activities are segmented as follows:
Trading: this heading includes financial service activity for customers;
Additionally, this point includes active management of the credit risk inherent in the balance
sheet of BST's banking business.
Structural Risks:
- Structural exchange-rate risk: the exchange-rate risk stemming from the currencies in
which investments are made in companies that may or may not be consolidated;
27
− Structural Variable Returns: this heading includes investments through equity holdings
in financial and non-financial companies that are not consolidated, generating a
variable-return risk.
Methodologies
Trading Activity
The standard method for trading activity applied during 2009 within the scope of BST's banking
business, was the Value at Risk (VaR). The historic simulation standard is used as the basis, with a
confidence level of 99 per cent. and a time spar of one day. Statistical adjustments were applied,
allowing fast, effective inclusion of more recent events conditioning the levels of risk assumed.
Complementing this is scenario analysis (stress testing), which consists of defining scenarios
covering the conduct of various financial variables and determining their impact on results when
applying them to the activities. Stress testing can replicate the conduct of financial variables that
occurred in the past (such as crises) or, on the contrary, it can determine plausible scenarios that
do not correspond to past events. In short, stress testing seeks to determine the potential risk under
extreme market conditions and on the fringes of probability of occurrence not covered by the VaR.
In parallel, positions are monitored on a daily basis and exhaustive control is undertaken of
changes to the portfolios with a view to detecting alterations of the profile or other incidents, in
order to correct them. Daily preparation of the income statement is a risk indicator to the extent
that it allows identification of the impact of the variations on the financial variables or of the
alteration of the composition of the portfolios.
Calibration and contract measures (Back-testing)
Reliability of the VaR model is periodically gauged through back-testing analysis. Back testing
consists of a comparative analysis between the calculations of the Value at Risk (VaR) and the
clean P&L (the result is associated with the re-evaluation of portfolios at the closing price of the
previous day and at the closing price of the following day), in which an analysis is performed of
sporadic deviations of the results compared with the estimated measurements.
Back-testing analyses performed at BST for its banking business meet BIS requirements in the
matter of comparison of internal systems used in the measurement and management of financial
risks.
Additionally, in back testing, hypothesis tests are performed: excess tests, normality tests, average
excess measurements, etc.
Limits
28
Quantitative limits are used for trading portfolios, classified into two groups in light of the
following objectives:
Limits designed to protect the volume of potential losses. Examples of limits of this type
include VaR limits on sensitivity measures (BPV or greeks) or on equivalent positions;
Limits designed to protect and accommodate the volume of actual losses or to protect results
already achieved during the period. The aim of this type of limit is to provide warnings on
positions that are generating losses (loss triggers), allowing decisions to be taken before the
maximum loss limit is reached (stop loss), as from which losses are considered as having
reached an unacceptable degree and the position will immediately be closed.
Balance sheet risk
Decisions relating to structural risk management are made by the Asset and Liability Committee
(“ALCO”), which is chaired by the President of the Executive Committee. The ALCO is comprised
of executive directors responsible for Financial, Treasury, Commercial, Marketing and
International departments of the BST Group. The ALCO meets every month to analyse balance
sheet risk and to make relevant decisions with regard to structural risk.
Interest rate risk
The interest rate risk of the consolidated balance sheet is measured through a dynamic risk
analysis model, which measures the increase of risk factors over time as well as the position of
BST in relation to assets and liabilities sensitive to interest rate changes. This model enables the
measurement and control of every risk factor associated with balance sheet risk, in particular the
risk directly created by yield curve movements. The existing index and re-pricing structure ensure
that yield curve movements determine the exposure of balance sheet aggregates to interest rate
risk.
Foreign exchange rate risk
Foreign exchange rate risk in commercial activity is measured and controlled by the global
foreign exchange position. The BST Group has a strategy that enables absolute coverage.
Liquidity risk
The BST Group liquidity policy is based on low liquidity risk and ongoing diversification of
funding sources, taking into consideration the volume and nature of the financing instruments to
be used. This is so as to allow for the implementation and good performance of the established
business plan.
By maintaining a conservative risk profile, BST is better protected against a potential liquidity
crisis, as it would have more time to prepare and implement adequate measures.
29
The mixed funding policy is based on adequate liquidity risk and compliance with established
limits. It is reviewed by the ALCO on a monthly basis. Liquidity risk limits are determined by an
independent body of management, which amongst other requirements, demands that a reasonable
volume of liquid assets are always available as a liquidity cushion.
All of the BST liquidity risk management processes are focused on crisis prevention and not on
post-crisis reaction. This principle underlies the BST Group contingency plan, which is focused on
envisaging potential crisis scenarios so as to determine the types of crisis that may arise, the
internal and external communications that may be required and the relevant responsibilities to be
allocated.
Liquidity risk management is undertaken at a consolidated level. The funding policy takes into
account changes to balance sheet aggregates, the structural adequacy of mature assets and
liabilities, the level of net interbank debt in light of available funding, the dispersion of mature
assets and liabilities, and the minimisation of costs inherent to the funding activity.
The following transactions contributed to the overall structural balance of the Issuer in 2009: a
securitisation operation in the sum of about €1 billion; a Covered Bonds issue in the sum of €1
billion; issues under the EMTN programme totalling €1.57 billion and the issue of long-term
liabilities in the form of deposits or bonds placed with retail customers.
Activity within the capital markets was irregular throughout 2009. As a result, the ECB acted as
counterparty by enabling liquidity injections and absorption. To take part in these operations,
banks must hold assets regarded by the ECB as eligible collateral. At the end of 2009, BST had
€9.8 billion of eligible assets, representing a comfortable liquidity cushion which considerably
reduces the liquidity risk of the BST Group. Furthermore, BST may also issue up to €2 billion
notes which will be guaranteed by the Portuguese Republic.
Operational risk
The BST Group defines operational risk as: "the risk of loss resulting from deficiencies or flaws in
internal processes, human resources or systems, or from external circumstances".
The operational risk management model is based on direct, active management by all departments
at every stage of the operational cycle. This involves the decentralisation of certain duties and
responsibilities. There is a central department that controls, supervises and is responsible for
implementing the operational risk model.
In addition, the "Management Milestone", which incorporates the rules of management, dictates
that the control of operational risk shall also be determined by the top management of the BST
Group. As a whole, the BST operational risk model meets the requirements established by Basel II,
as well as those determined by the Bank of Portugal.
The implementation and constant improvement of the Management Milestone allow for the:
30
• identification of operational risk inherent in all BST activities, products, processes and
systems;
• measurement and assessment of the operational risk in an objective, ongoing manner
consistent with Basel II;
• ongoing monitoring of operational risk exposures in order to detect risk levels, implement
control procedures, improve in-house knowledge and mitigate losses; and
• establishment of mitigating measures to eliminate and/or minimise operational risk.
The measures listed above allow integral and effective management of operational risk,
improvement of knowledge in relation to actual and potential operational risks as well as
improvement of processes and controls, whilst always aiming for a reduction of losses.
Technology and Systems
The BST Technology and Systems department has benefited from the improved manageability of
software, hardware and communications platforms, which increase BST’s technological power
and its ability to manage macro contracts worldwide.
In 2009, BST continued with project Partenon/Alhambra started in 2008, which allowed it to
capture synergies, to share structures and technological developments so as to standardise
services to world clients and pursue a uniform technological platform for all of the BST Group.
This project started with the implementation of a new platform to support all banking activity, with
the aim of migrating accounts from the legacy system to this new platform. BST opted to
systematise the migration of its retail network in order to minimise the negative impact on clients,
starting with the small branches in May 2009 and continuing with the large branches in December
2009.
Investment in supporting strategic areas continued throughout 2009, such as the support provided
to standardised risk decision systems, risk analysis tools and fulfilling the measures under Basel II.
Inter alia, BST also implemented solutions regarding: international means of payment, measures
required by MiFID, the centralisation of risk tools, consumer credit applications and measures to
prevent real estate exposure in case of an increase in unemployment levels. In addition, dynamic
commercial applications were reinforced by offering supporting tools to the commercial
management of the local network. Further investments were made to update and maintain the
uniform technological platform, in accordance with the requirements of current legislation.
Within the NetBanco segment, there was an increase in the offer of certain services and
functionalities, such as digital credit cards and duplicates of electronic payments.
In the Global Banking and Markets segment there was a greater focus on offering products and
solutions that are aligned to market expectations, particularly given the recent instability and
volatility within the markets.
31
The BST Compliance, Operational Continuity and Quality departments developed and
implemented a set of measures to effect the efficient management of technological systems, aiming
to reduce operational risk and enhance business sustainability. In this context, the Disaster
Recovery program was piloted in order to avoid disruption to the information system in case of
technological difficulties.
In order to ensure the continuous enhancement of Internal Risk Control, BST reinforced its policy
of monitoring and reporting available services, analysing profiles and authorising access to users
only in accordance with the recommendations of the Bank of Portugal.
Quality
The BST Group continued to maintain and develop its commitment to quality of service and
excellence in client attention, so as to increase client loyalty and satisfaction.
The Quality of Service department developed quality tables for the different areas of business and
business support, with a special emphasis on the review of client service levels. Throughout 2009,
almost 100 internal and external quality audits have been undertaken (the latter carried out by
APCER), giving rise to 220 improvement recommendations within a network of 1,700 employees.
In 2009, the percentage of satisfied clients and of clients who were happy to recommend BST
increased to 82 per cent. and 88 per cent. respectively.
Over 88 per cent. of the local network achieved the META 100 score, which is an indicator of
quality of service.
The total amount of telephone surveys completed by clients reached 70,000 and more than 4,000
unscheduled visits took place, with around 2,700 telephone audits to local branches being
conducted. In 2009 BST maintained the highest score in the valuation of unscheduled visits within
the domestic retail network, as calculated by Multimétrica.
The number of formal customer complaints increased as a result of the market crisis during the
first semester of 2009. However, BST uses such complaints as a tool to improve its relationship
with clients. BST handles client complaints by virtue of a centralised process, in order to provide
the whole network with important data that will rapidly solve any complaints that may arise.
Organisational Structure
Santander Totta Group
The Santander Totta Group in Portugal is a global financial group focusing its operation in two
main business areas: commercial retail banking and investment banking. The Santander Totta
Group in Portugal provides a full range of products and services to individuals, companies and
institutional investors, and comprises the commercial retail and, following the incorporation of
BSN by BST, the investment bank networks of the Issuer, and the related group of operating
companies which are controlled by Santander Totta, SGPS, S.A.
32
The holding company in Portugal, Santander Totta, SGPS, S.A., separates the activities of the
participating companies and the investment bank business from the activities of the Issuer. The aim
of this corporate structuring, whereby all the banks and operating companies of the Santander
Totta Group are controlled by Santander Totta, SGPS, S.A., is essentially to increase the Santander
Totta Group’s strength and solvency, as well as to provide transparency to the marketplace and
allow for adequate supervision on a consolidated basis.
The diagram on the next page shows the structure of the Santander Totta Group as at 31 May
2010.
* Own shares: Santander Totta SGPS has 0.013 per cent.;
Banco Santander Totta has 0.009 per cent.; and
Santander Gestão de Activos SGPS has 0.267 per cent.
** Issuer: Banco Santander Totta is highlighted in red in the center of the chart.
History of Banco Santander Totta, S.A.
Following an agreement entered into on 7 April 2000 between Banco Santander Central Hispano
(“BSCH”), Mr. António Champalimaud (the former controlling shareholder of Banco Totta &
Açores, “BTA”) and Caixa Geral de Depósitos S. A., BST acquired a controlling interest of 94.68
per cent. in BTA and 70.66 per cent. in Crédito Predial Português (“CPP”). In June 2000, through
its associate Santusa, BSCH made a public acquisition offer for all of the outstanding shares of
BTA and CPP. In December 2000, following a capital increase of BTA and the restructuring of the
investments of the BST Group in Portugal, BTA became the head of the BTA Group, which, in
addition to CPP, comprised Banco Santander Portugal (“BSP”) and BSN. The first complete year
under the Santander Group structure was 2001.
BST was established following a corporate restructuring process completed in December 2004,
which merged the commercial banks within the Santander Group in Portugal (being BTA, CPP and
BSP) into a single legal entity. The outcome was a holding company (Santander Totta), holding the
commercial bank BST and the investment bank BSN. The restructuring process has been approved
by the Bank of Portugal and at the Shareholders' General Meetings of BTA, CPP and BSP on 15
October 2004, with the granting and filing of the deed completed on 19 December 2004.
The restructuring was an internal reorganisation of the BST Group in Portugal and resulted in BTA
transferring, by operation of the merger, all of its assets into BST, which assumed all the
obligations of BTA by operation of law.
In May 2010, BSN was incorporated into BST following a merger process that was initiated in
2009.
As a result of the merger the share capital of BST increased from €589.810.510 to €620.104.983.
BST is the parent company to various subsidiaries and its financial results are affected by the
cashflows and dividends from its subsidiaries.
As at 31 May 2010, the majority shareholders of BST were:
Shareholder Quantity of shares Equity (per cent.)
Santander Totta, SGPS 604,651,319 97.508
Taxagest 14,593,315 2.353
Considering that both the shareholders of BST – Santander Totta, SGPS, S.A. and TaxaGest SGPS,
S.A. (two holdings comprised in the Santander Totta Group) – are indirectly fully owned by Banco
Santander, S.A., the Bank is indirectly fully owned by Banco Santander, S.A..
35
BST, being (i) a credit institution and (ii) a financial intermediary (i.e. an entity which provides
investment services/activities and ancillary services) and an issuer of securities admitted to trading
on a Portuguese regulated market, is subject to the supervision of respectively (i) the Bank of
Portugal and (ii) the CMVM, which, among other regulatory areas, supervise the acquisition and
disposition of substantial holdings in BST.
BST is managed by a Board of Directors (Conselho de Administração) elected at the General
Shareholders’ Meeting for a three-year period and each of its members is governed by principles of
legality, transparency and responsibility in order to boost and optimise the interests of its
shareholders and creditors (in accordance with Commercial Companies Code – Article 64). The
Board of Directors is responsible to the Bank’s creditors if, through its non-observance of the law,
it allows property dilapidation (in accordance with Commercial Companies Code – Article 78).
The General Shareholders’ Meeting also elects for a three year period (i) the members of its
Supervisory Board (Conselho Fiscal), in charge inter alia of supervising BST’s activity, (ii) its
Statutory Auditor (Revisor Oficial de Contas) responsible for certifying the Issuer’s accounts
(revisão oficial de contas) and (iii) the members of the General Shareholders’ Meeting Board (Mesa
da Assembleia Geral).
Management and Statutory Bodies
Statutory Bodies for the business years 2010-2012
BOARD OF DIRECTORS
Chairman: António Mota de Sousa Horta Osório
Deputy-Chairmen: Matías Pedro Rodriguez Inciarte
Nuno Manuel da Silva Amado
Directors: Miguel de Campos Pereira de Bragança
António José Sacadura Vieira Monteiro
José Manuel Alves Elias da Costa
Carlos Manuel Amaral de Pinho
Luís Filipe Ferreira Bento dos Santos
Eduardo José Stock da Cunha
José Carlos Brito Sítima
Pedro Aires Coruche Castro e Almeida
José Urgel Moura Leite Maia
36
EXECUTIVE COMMITTEE
Chairman: Nuno Manuel da Silva Amado
Members: António José Sacadura Vieira Monteiro
José Carlos Brito Sítima
José Manuel Alves Elias da Costa
José Urgel Moura Leite Maia
Luís Filipe Ferreira Bento dos Santos
Miguel de Campos Pereira de Bragança
Pedro Aires Coruche Castro e Almeida
SUPERVISORY BOARD
Chairman: António Mendo Castel-Branco Borges
Members: Mazars & Associados, SROC, S.A., represented
by Fernando Jorge Marques Vieira
Ricardo Manuel Duarte Vidal Castro
Alternate: Pedro Alves Guerra
STATUTORY AUDITOR
Main: Deloitte & Associados - SROC, S.A.,
represented by Maria Augusta Cardador
Francisco
Alternate: Carlos Luís Oliveira de Melo Loureiro, ROC
GENERAL SHAREHOLDERS’
MEETING BOARD
Chairman: António Manuel de Carvalho Ferreira Vitorino
Vice-Chairman: António de Macedo Vitorino
Secretary: António Miguel Leonetti Terra da Mota
37
Principal activities of directors outside of BST
Name Company Function
António Mota de Sousa Horta Osório
Banco Santander, S.A. (Espanha) General Director
Member of the Directive Committee
Santander Investment, S.A. (Espanha) Director
Abbey National, Plc. (Reino Unido) Chairman of the Executive Committee
Santander Totta, S.G.P.S., S.A. Chairman of the Board of Directors
Portal Universia Portugal, S.A. Deputy-Chairman of the Board of
Directors
Bank of England Director
Nuno Manuel Silva Amado
Banco Santander, S.A (Espanha) General Director
Member of the Directive Committee
Santander Totta, S.G.P.S., S.A. Deputy-Chairman of the Board of Directors and Chairman of the
Executive Committee
Portal Universia Portugal, S.A. Deputy-Chairman of the Board of Directors and Chairman of the
Executive Committee
Câmara de Comércio e Indústria Luso Espanhola
Deputy-Chairman of the Directive Board
Matias Rodrigues Inciarte
Banco Santander, S.A (Espanha) Third Deputy-Chairman of the Board
of Directors
Banco Espanhol de Crédito, S.A. Director
Santander Totta, S.G.P.S., S.A. Deputy-Chairman of the Board of
Directors
Financeira Ponferrada, S.A. Director
SCH Seguros e Reseguros, S.A. Director
União de Crédito Imobiliário, S.A. Chairman of the Board of Directors
Operador do Mercado Ibérico de Energia Pólo Espanhol, S.A.
Director
Sanitas, S.A. Advisor
38
Miguel de Campos Pereira de Bragança
Santander Totta, S.G.P.S., S.A. Director and member of the Executive
Committee
Taxagest - Sociedade Gestora de Participações Sociais, S.A.
Chairman of the Board of Directors
Partang, SGPS, S.A. Director
SIBS – Sociedade Interbancária de Serviços, S.A.
Director
António José Sacadura Vieira Monteiro
Portal Universia Portugal, S.A. Director and member of the Executive
Committe
Santander Totta, S.G.P.S., S.A. Director and member of the Executive
Committe
Partang, SGPS, S.A. Chairman of the Board of Directors
Eduardo José Stock da Cunha
Santander Totta, S.G.P.S., S.A.* Director and member of the Executive
Committe
SIBS – Soc. Interbancária de Serviços, S.A. *
Director
Sovereign Bank
Member of the Management Executive Commitee
Head of Manufacturing
José Manuel Alves Elias da Costa
Santander Totta, S.G.P.S., S.A. Director and member of the Executive Committe
José Carlos Brito Sítima Portal Universia Portugal, S.A. Chairman of the General Shareholders’ Meeting
Santander Totta, S.G.P.S., S.A. Director and member of the Executive Committe
Tottaurbe – Empresa de Administração e Construções, S.A.
Chairman of the Board of Directors
Luís Filipe Ferreira Bento dos Santos
Portal Universia Portugal, S.A. Director and member of the Executive Committe
Pedro Aires Coruche Castro e Almeida
Santander Totta Seguros – Companhia de Seguros de Vida, S.A.
Chairman of the Board of Directors
José Urgel Moura Leite Totta – Crédito Especializado
Instituição Financeira de Crédito,
Director
39
Maia S.A.
Associação dos Amigos do Recife Chairman of the Supervisory Board
The address of each of the directors above is Banco Santander Totta, S.A., Rua Áurea, no. 88,
1100-063 Lisbon, Portugal.
Principal activities of members of the Supervisory Board outside of BST
Name Company Function
António Mendo Castel-Branco Borges
Santander Totta, S.G.P.S., S.A. Chairman of the Supervisory Board
Hedge Fund Standards Board Chairman
CNP Assurances (France) Director
SCOR (France) Director
Caixa Seguros (Brasil) Director
Jerónimo Martins Director
Heidrick and Struggles (USA) Director
Fundação Champalimaud Director
Mazars & Associados, S.R.O.C.
Santander Totta, SGPS, S.A. Member of the Supervisory Board
TC – Turismo Capital, SCR, S.A. Member of the Supervisory Board
Ricardo Manuel Duarte Vidal de Castro
Santander Totta, S.G.P.S., S.A. Member of the Supervisory Board
Banco Rural Europa, S.A. Member of the Supervisory Board
Pedro Manuel Alves Ferreira Guerra
Santander Totta, S.G.P.S., S.A. Alternate member of the Supervisory Board
The address of each of the members of the Supervisory Board is Banco Santander Totta, S.A., Rua
Áurea, no. 88, 1100-063 Lisbon, Portugal.
Employees
Certain terms and conditions of employment in the banking sector in Portugal are negotiated with
trade unions and wage negotiations occur on an industry-wide basis. BST has not experienced any
material labour problems and it believes that its relations with its employees are generally
40
satisfactory. The major objectives of the Santander Totta Group’s staff management programme
are directed at creating and improving team spirit through, among other measures, recruitment,
training plan and early retirement schemes.
Material Contracts
As at the date of this Base Prospectus, there are no material contracts that are reasonably likely to
have a material effect on the Base Prospectus.
Conflicts of Interest
There are no potential conflicts of interest between any duties to the Issuer by any of the members
of either the Board of Directors, the Executive Committee or the Supervisory Board in respect of
their private or other duties.”
41
VII. PORTUGUESE BANKING SUPERVISION AND REGULATION
25. The fourth subparagraph under the second paragraph under the heading “General
Regulatory Framework of Credit Institutions and Financial Companies” shall be
replaced with the following:
“improving controls over supervised institutions by changing the notion of a qualifying
shareholding, which has been further amended by Decree-Law 52/2010 of 26 May,
implementing Directive 2007/44/EC, so that there is an assumption that significant
influence can be exercised over management when one person or entity holds at least
10 per cent. of the voting rights or share capital of the institution. Additionally, lower
holdings of at least 5 per cent. of the voting rights or share capital of credit institutions
and certain financial companies may also be classified as qualifying holdings by the
Bank of Portugal; and”
26. The section with the heading “Capital Adequacy and Solvency Ratios” shall be
replaced with a section with the same heading as follows:
“Portuguese banks are required to have a certain minimum level of own funds. These
requirements conform with the EU directives, fixing common standards for the
measurement of capital (generally referred to as the “Own Funds Directive”) and
establishing a system for weighting assets according to credit risk (generally referred
to as the “Solvency Ratio Directive”) with the requirement that the capital adequacy
ratio may not be lower than 8 per cent.; in particular cases, the Bank of Portugal may
impose a higher solvency ratio to ensure assets are weighted according to credit risk,
which has not been imposed on BST. The Bank of Portugal minimum mandatory
requirement for Tier 1 capital is 4 per cent.
The solvency ratio of the Santander Totta Group complies with the Bank of Portugal
rules and in accordance with the Basel II regulatory framework and the application of:
(i) the internal notations method (advanced by IRB) for calculating the equity
requirements in relation to substantial part of the relevant loan portfolio; (ii) the
standard method for calculating market risk; and (iii) the basic indicator method for
calculating the equity requirements in relation to operational risk, Tier I Capital and
Core Capital of BST rose, as of 31 December 2009, to 9.1 per cent. and 7.6 per
cent.respectively (to include profit gained in 2009). This demonstrates the solid and
solvent nature of the BST balance sheet.”
42
million euro 2009 2008 Change
IRB Standard
Total capital 2 564 2 576 -0.5%
Tier I Capital 2 193 2 091 +4.9%
Tier II capital 371 486 -23.6%
Risk weighted assets 24 074 24 956 -3.5%
Core Capital 7.6% 6.7% +0.9 p.p.
Tier I 9.1% 8.4% +0.7 p.p.
Solvency Ratio 10.7% 10.3% +0.4 p.p.
”
27. In the paragraphs under the heading “Impairment” reference to “Santander Totta
Group shall be replaced with references to “BST”.
28. The second and third paragraphs under the heading “Deposit Guarantee Fund” shall
be replaced with the following:
“The annual contributions are defined according to the monthly average of the
deposits balance accepted in the previous year and to the fixed contribution rate,
weighted by the average solvency ratio of each institution in the previous year (the
lower an institution’s ratio, the higher its contribution). The annual contributions rate
is determined yearly by the Bank of Portugal up to a limit of 0.2 per cent. and was
settled at 0.03 per cent. for the year of 2010, by means of regulatory instruction no.
19/2009.
The Bank of Portugal defines the limit, between 0 per cent. and 75 per cent., up to
which the payment of the annual contributions may be replaced by an irrevocable
contract, guaranteed where necessary by securities having a low credit risk and high
liquidity. The Bank of Portugal settled this limit at 10. per cent. for the year 2010, by
means of regulatory instruction no. 20/2009. If the resources are insufficient to comply
with its commitments, the Ministry of Finance, as per a ministerial order (Portaria),
may determine that additional contributions shall be made by the participants in the
DGF.”
VIII. THE PORTUGUESE MORTGAGE MARKET
29. The entire section shall be replaced with the following:
“The Portuguese residential mortgage market is valued at €121,063,000,000, as at 31
December 2009 (as reported by the Bank of Portugal and including securitised
mortgages).
Following solid growth over the past few years (with the number of new mortgages
averaging 150,000 per year), the mortgage market has seen a substantial deceleration,
as a reaction to the financial and economic crisis which started in mid-2007.
43
In 2008, the number of new mortgages fell to 108,931, the lowest annual number since
1995. This reflects both a lower demand, given the constraints on household budgets
(as a result of higher interest rates and rising unemployment), and a lower supply (as a
result of very challenging financial conditions which made it difficult for banks to
access the wholesale markets). Although there is no data available for 2009, the Bank
of Portugal has reported that the granting of mortgages fell by 30 per cent. to
€9,300,000.
At the same time, the average value of each mortgage loan has stabilised at around
€96,500, following a sustained increase at the start of the decade, where the average
mortgage size increased by 50 per cent..
The charts below have been sourced from the Direcção Geral do Tesouro (the
“DGT”), the Portuguese Treasury Department, and the Instituto Nacional de
Estatística (the “INE”), the Portuguese National Statistics Institute, and illustrate the
above statistics for up to 2008.
Average mortgage (thousand euros)Average mortgage (thousand euros)New mortgages (number and value)New mortgages (number and value)
Sources: INE, DGT
95.696.7 97.7
93.7
0
10
20
30
40
50
60
70
80
90
100
110
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
1T
07
2T
07
3T
07
4T
07
1T
08
2T
08
3T
08
4T
08
Value 95.696.7 97.7
93.7
0
10
20
30
40
50
60
70
80
90
100
110
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
1T
07
2T
07
3T
07
4T
07
1T
08
2T
08
3T
08
4T
08
Value
108.9
149.0
149.1 10.5
14.0
13.9
0
50
100
150
200
250
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
1T
07
2T
07
3T
07
4T
07
1T
08
2T
08
3T
08
4T
08
10^3
0
2
4
6
8
10
12
14
1610^6
Number of contracts Total Amount
108.9
149.0
149.1 10.5
14.0
13.9
0
50
100
150
200
250
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
1T
07
2T
07
3T
07
4T
07
1T
08
2T
08
3T
08
4T
08
10^3
0
2
4
6
8
10
12
14
1610^6
Number of contracts Total Amount
In recent years, there has been a steady and balanced relationship between housing
demand and supply. This has allowed for the increase in demand to be met by an
increase in supply, thus enabling a stabilisation of Portuguese housing prices in recent
years, in contrast with the position of certain other EU countries.
In 2008 and 2009, the decrease in demand has been reflected in a decrease of supply,
thus resulting in a situation where housing prices have remained fairly stable, once
again, in contrast with the position of other European countries, where, following the
burst of the residential housing bubble, such prices have fallen steeply.
In 2009, building permits fell to their lowest level in two decades, due to the significant
decline in demand. The INE has revised its methodology for determining the number of
housing completions (so as to now include the issuance of building permits) but has
not released new information for the first quarter of 2009.
44
Housing completionsHousing completionsBuilding PermitsBuilding Permits
Note: acording to the new methodology, completions are computed based on past permits, assuming that the building process is 18 months long
41 332
15 914
0
10 000
20 000
30 000
40 000
50 000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
-35
-25
-15
-5
5
15
25
35
Building Permits
YoY (RHS)
41 332
15 914
0
10 000
20 000
30 000
40 000
50 000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
-35
-25
-15
-5
5
15
25
35
Building Permits
YoY (RHS)
124 297
79 565
0
20 000
40 000
60 000
80 000
100 000
120 000
140 000
Dez
-90
Dez
-91
Dez
-92
Dez
-93
Dez
-94
Dez
-95
Dez
-96
Dez
-97
Dez
-98
Dez
-99
Dez
-00
Dez
-01
Dez
-02
Dez
-03
Dez
-04
Dez
-05
Dez
-06
Dez
-07
Dez
-08
Dez
-09
-30
-20
-10
0
10
20
30
40Housing completions
YoY (RHS)
124 297
79 565
0
20 000
40 000
60 000
80 000
100 000
120 000
140 000
Dez
-90
Dez
-91
Dez
-92
Dez
-93
Dez
-94
Dez
-95
Dez
-96
Dez
-97
Dez
-98
Dez
-99
Dez
-00
Dez
-01
Dez
-02
Dez
-03
Dez
-04
Dez
-05
Dez
-06
Dez
-07
Dez
-08
Dez
-09
-30
-20
-10
0
10
20
30
40Housing completions
YoY (RHS)
Sources: INE
Since 2000, housing prices in Portugal have increased in line with the consumer price
index (published by INE), that is to say, an increase of 2 to 3 per cent. per year.
Portuguese housing prices have therefore experienced a relatively lower increase in
comparison to that of other EU countries, such as Spain, Ireland and France. This
lower volatility is reflected in the more moderate price developments of 2009, where
Portuguese housing prices remained stable, in contrast with the majority of the
developed world.
Cumulative House Price Increases (%)Cumulative House Price Increases (%)House Prices (%, YoY)House Prices (%, YoY)
Sources: Confidencial Imobiliário, Reuters, Banco de Portugal
Until 2008, the structural reduction in interest rates (since the introduction of the
Euro) allowed for continued growth in the demand for housing, which in turn
supported the growth in the number of mortgages by up to 10 per cent. per year, in
spite of a slowing economy. However, as of late 2008, weak economic prospects and
the rise in Euribor interest rates have resulted in a decreased demand for housing. In
2009, the demand for housing rapidly declined, with mortgage credit increasing by
approximately 3 per cent..
The rise in interest rates between 2006 and 2008, in association with high levels of
(largely mortgage-related) debt, has resulted in an increase of interest costs, to
45
approximately 8.1 per cent. of disposable income (as in 2008). In 2009, the sharp
reduction in interest rates instigated by the European Central Bank allowed for a
reduction of such costs, to less than 6 per cent. of disposable income.
Household Indebtedness (% disp. Income)Household Indebtedness (% disp. Income)Credit to Households (%, YoY)Credit to Households (%, YoY)
Sources: Banco de Portugal, INE
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Mortgages
Other Consumption
YoY, %
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Mortgages
Other Consumption
YoY, %
0
20
40
60
80
100
120
140
160
1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Mortgages
other credit
Interest (RHS)
0
20
40
60
80
100
120
140
160
1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
Mortgages
other credit
Interest (RHS)
As evident from the chart on the left, and marked in red therein, the number of
mortgage loans has decreased from approximately ten per cent. (in 2006 and 2007) to
approximately three per cent. (in 2009).
Mortgage growth is forecast to remain subdued, although it is possible that it will
remain above the growth rate of GDP, as opposing trends are likely to dominate
market dynamics. Contributing factors to subdued mortgage growth will be: (i) the
cycle of business, particularly with regard to rising unemployment and tightening
credit standards for retail mortgages; and (ii) tightening credit standards for wholesale
loans, accompanied by rising costs for the Portuguese banking sector. On the other
hand, the absence of a rental market will result in higher rates of ownership and
interest rates will, together with housing prices, remain relatively low.”
IX. ISSUER’S STANDARD BUSINESS PRACTICES
30. The entire section shall be replaced with the following:
“The internal procedure for the approval of an application for a mortgage-backed loan
involves: (i) the creation of an application by the relevant branch within the internal
financial system; and (ii) the receipt of the relevant documentation (either the originals
or authenticated copies) from the potential borrower. In respect of each mortgage-
backed loan application, the transaction and client in question are analysed by a risk
analyst who will focus, among other things, on the loan application, the security to be
given, the maturity of the loan, and the borrowing capacity, scoring and income of the
potential borrower.
After an application has been accepted, the branch and client begin the contractual
process. This process may be summarised as follows:
46
On a broader scale, the full process may be summarised as follows:
Valuation
Valuations of mortgaged houses are randomly distributed to, and carried out by,
valuation companies that work with BST under an outsourcing scheme (which includes
only national valuation companies certified by the CMVM), and subject to quotes that
are defined from time to time by BST. Such valuation companies organise for their
assessors to visit the houses in question, and to make the relevant assessment and
valuations in accordance with applicable prospect values. Each of these valuation
companies has a central department that validates each valuation that has been
carried out. The results are subsequently uploaded on the internal website of BST. A
Proposal
Reception
Information
Analysis and
Treatment
Approved?
Denied
End of the
Process
Yes
Process
Formalization
No
Yes
Client
Decision
No End of the
Process
Process
Creation
Income/
Expenses
Introduce job
related info
Introduce
Mortgage info
Document checking
Digital scanning
Related
processes?
Yes Associate
Loans
No
Send to
Scoring
(*)
STW Decision:
Denied?
Yes Go on with
the proposal?
No Denied
Yes
Put under
analysis
Credit
Risk
Approval
Modify?
Yes Return to
Scoring
Change data
No
STW
Decision
:
Review?
No STW Decision:
Conditional
Approv. 2 Yes
Wait for
Bank
of Portugal
?
Yes STW Decision: Approved
Risk Credit Approval Yes
The
Branch
has power
s?
No
Yes
APPROVE D
CH
No
Higher level of
authority required
Distribute
Propposal
Mod
ify? No
Return to
Scoring
Yes
Change data
Credit
Risk
Approval
Send to Scoring
UDO
has
powers
?
No
Higher level of
authority
required
Yes DECIDE
UDO
Approves?
No
Branch
If re-appreciation is required, receive the loan,
Reactivate the process (it goes back to (*)).
Yes
No
47
group of independent engineers (that are hired by BST) monitor the quality of such
valuations using appropriate valuation samples.
Monitoring process
The monitoring process is comprised of three stages: (i) the branch level; (ii) the call
center level; and (iii) the pre-non-performing loan level, that are applicable depending
on the number of days by which the borrower is in default.
At the branch level, during the first five days of arrears the relevant branch will
contact the borrower in an informal way so as to arrange for the default to be
remedied.
The call center level is applicable after the fifth day of arrears, where the call center
will contact the borrower on a regular basis so as to reach an agreement. The call
center will follow standardised procedures and all action taken will be registered.
Credit recovery organisational model
”
X. TAXATION
31. References to the website “www-dgci.min-financas.pt” shall be replaced with
references to the website “www.portaldasfinancas.gov.pt”.
32. The section with the heading “1. Covered Bonds not held through a centralised
control system” shall be replaced with a section with the same heading as follows:
48
“Interest and other types of investment income obtained on Covered Bonds by a
Portuguese resident individual is subject to individual tax. If the payment of interest or
other investment income is made available to Portuguese resident individuals,
withholding tax applies at a rate of 21.5 per cent, which is the final tax on that income
unless the individual elects to include it in his taxable income, subject to tax at
progressive rates of up to 45.88 per cent. tax rate (this progressive tax rate shall be
increased as from 1 January 2011 to 46.5 per cent.). In this case, the tax withheld is
deemed a payment on account of the final tax due.
In the case of zero coupon Covered Bonds, the difference between the redemption value
and the subscription cost is qualified as investment income and is also subject to
Portuguese income tax.
Capital gains obtained by Portuguese resident individuals on the transfer of Covered
Bonds are not subject to tax. Accrued interest qualifies as investment income, rather
than as capital gains for tax purposes. Note that it is expected that during 2010 capital
gains taxation arising from the disposal of Notes obtained by Portuguese tax resident
individuals will be taxed at a special tax rate of 20 per cent. on the positive difference
between the capital gains and capital losses of each year. Accordingly, the effect of
these proposed changes will be that any gains arising from the disposal of Covered
Bonds obtained by Portuguese tax resident individuals and not offset against any
available capital losses will be taxed at 20 per cent in 2010. In this respect, it is also
expected that an income tax exemption will apply if such annual positive difference
does not exceed € 500.
Interest and other investment income derived from Covered Bonds and capital gains
realised with the transfer of Covered Bonds by legal persons resident for tax purposes
in Portugal and by non resident legal persons with a permanent establishment in
Portugal to which the income or gains are attributable are included in their taxable
income and are subject to a progressive corporate tax rate according to which a 12.5
per cent tax rate will be applicable on the first € 12,500 of taxable income and a 25
per cent tax rate will be applicable on taxable income exceeding €12,500, which may
be subject to a municipal surcharge (derrama) of up to 1.5 per cent over their taxable
profits. Corporate taxpayers with a taxable income of more than € 2,000,000 are also
subject to State surcharge (derrama estadual) of 2.5 per cent. on the part of it’s taxable
profits that exceeds € 2,000,000. Withholding tax at a rate of 21.5 per cent will be
applied on interest and other investment income, which is deemed a payment on
account of the final tax due.
Financial institutions, pension funds, retirement and/or education savings funds, share
savings funds, venture capital funds incorporated under the laws in Portugal and some
exempt entities, among other entities, are not subject to withholding tax. Interest and
other types of investment income obtained by non resident beneficial owner’s
individuals are subject to withholding tax at a rate of 21.5 per cent., which is the final
tax on that income. As for non-resident beneficial owners that are legal persons
49
without a Portuguese permanent establishment to which the income is attributable,
interest and other types of investment income obtained are subject to withholding tax at
a rate of 20per cent., which is the final tax on that income. Under the tax treaties
entered into by Portugal which are in full force and effect on the date of this Base
Prospectus, the withholding tax rate may be reduced to 15, 12, 10 or 5 per cent.,
depending on the applicable treaty and provided that the relevant formalities
(including certification of residence by the tax authorities of the beneficial owners of
the interest and other investment income) are met. The reduction may apply at source
or through the refund of the excess tax. The forms currently applicable for these
purposes were approved by Order (Despacho) 30.359/2007, of the Portuguese Minister
of State and Finance, published in the 2nd
Series of Portuguese official gazette no. 251,
of 31 December, which may be available at www.portaldasfinancas.gov.pt.
Capital gains obtained by non resident individuals on the transfer of Covered Bonds
are not subject to tax. However, it is expected that during the course of 2010: (i)
capital gains obtained by non-resident individuals in a country, territory or region
subject to a clearly more favourable tax regime included in the “low tax jurisdictions”
list approved by Ministerial Order 150/2004, of 13 February (Lista dos países,
territórios e regiões com regimes de tributação privilegiada, claramente mais
favoráveis) that do not have a permanent establishment in Portugal to which the
income is attributable will be exempt from personal income tax, and (ii) capital gains
obtained by non-resident individuals that are not entitled to said exemption will be
subject to taxation at a 20 per cent flat rate. Accrued interest does not qualify as
capital gains for tax purposes.
Gains obtained on the disposal of Covered Bonds by a legal person non resident in
Portugal for tax purposes and without a permanent establishment in Portugal to which
gains are attributable are exempt from Portuguese capital gains taxation, unless the
share capital of the beneficial owner is more than 25 per cent. directly or indirectly
held by Portuguese resident entities or if the beneficial owner is resident in a country,
territory or region subject to a clearly more favourable tax regime included in the “low
tax jurisdictions” list approved by Ministerial Order 150/2004, of 13 February (Lista
dos países, territórios e regiões com regimes de tributação privilegiada, claramente
mais favoráveis). If the exemption does not apply, the gains will be subject to corporate
income tax at a rate of 25 per cent.. Under the tax treaties entered into by Portugal,
such gains are usually not subject to Portuguese corporate income tax, but the
applicable rules should be confirmed on a case by case basis.
Stamp tax at a rate of 10 per cent. applies to the acquisition through gift or inheritance
of Covered Bonds by an individual who is domiciled in Portugal. An exemption applies
to transfers in favour of the spouse, de facto spouse, descendants and
parents/grandparents. The acquisition of Covered Bonds through gift or inheritance by
50
a Portuguese resident legal person or a non resident acting through a Portuguese
permanent establishment is subject to a progressive corporate tax rate according to
which a 12.5 per cent tax rate will be applicable on the first € 12,500 of taxable
income and a 25 per cent tax rate will be applicable on taxable income exceeding
€12,500, which may be subject to a municipal surcharge (derrama) of up to 1.5 per
cent over their taxable profits. Corporate taxpayers with a taxable income of more
than € 2,000,000 are also subject to State surcharge (derrama estadual) of 2.5 per
cent. on the part of it’s taxable income that exceeds € 2,000,000.
No stamp tax applies to the acquisition through gift and inheritance of Covered Bonds
by an individual who is not domiciled in Portugal. The acquisition of Covered Bonds
through gift or inheritance by a non resident legal person is subject to corporate
income tax at a rate of 25 per cent.. Under the tax treaties entered into by Portugal,
such gains are usually not subject to Portuguese tax, but the applicable rules should be
confirmed on a case by case basis.
There is no wealth or estate tax in Portugal.”
33. The section with the heading “EU Savings Directive” shall be replaced with a section
with the same heading as follows:
Under Council Directive 2003/48/EC, of 3 June 2003, on taxation of savings income in
the form of interest payments (the “Directive”), Member States are required to provide
to the tax authorities of another Member State details of payments of interest (or
similar income) paid by a person within its jurisdiction to an individual resident in that
other Member State of the EU or to certain limited types of entities established in that
other Member State of the EU. However, for a transitional period, Luxembourg and
Austria are instead required (unless during that period they elect otherwise) to operate
a withholding system in relation to such payments (the ending of such transitional
period being dependent upon the conclusion of certain other agreements relating to
information exchange with certain other countries). A number of non-EU countries
and territories, including Switzerland, have adopted similar measures (a withholding
system in the case of Switzerland). On 15 September 2008 the European Commission
issued a report to the Council of the European Union on the operation of the Directive,
which included the Commission’s advice on the need for changes to the Directive. On
13 November 2008 the European Commission published a more detailed proposal for
amendments to the Directive, which included a number of suggested changes. The
European Parliament approved an amended version of this proposal on 24 April 2009.
If any of the proposed changes are made in relation to the Directive they may amend or
broaden the scope of the requirements described above. If a payment were to be made
or collected through an EU Member State which has opted for a withholding system
and an amount of, or in respect of, tax were to be withheld from that payment, neither
51
the Issuer nor any Paying Agent nor any other person would be obliged to pay
additional amounts with respect to any Covered Bond as a result of the imposition of
such withholding tax. The Issuer is required to maintain a Paying Agent in an EU
Member State that is not obliged to withhold or deduct tax pursuant to the Directive.
XI. SUBSCRIPTION AND SALE AND SECONDARY MARKET ARRANGEMENTS
34. In the section with the heading “Portugal” under (v) the word “regulated” shall be
inserted before “market”.
XII. GENERAL INFORMATION
35. The paragraph under the heading “Authorisation” shall be amended as follows:
“The establishment of the Programme was duly authorised by a resolution of the
Executive Committee of the Board of Directors of the Issuer on 9 January 2008, its
update for 2009 was authorised by a resolution of the Executive Committee of the
Board of Directors of the Issuer on 17 June 2009, and its update for 2010 was
authorised by a resolution of the Executive Committee of the Board of Directors on 16
June 2010, in accordance with the provisions of the Covered Bonds Law.”
36. The paragraph under the heading “Significant or material change” shall be amended
as follows:
“Save as disclosed in the Outlook for 2010 section of this Base Prospectus, there has
been no significant change in the financial or trading position of the Issuer since 31
December 2009 and there has been no material adverse change in the financial
position or prospects of the Issuer since 31 December 2009”.
37. The second sentence of the fourth paragraph under the heading “Accounts” shall be
amended as follows:
“The years ended 31 December 2008 and 31 December 2009 were audited by Deloitte
& Associados - SROC, S.A., represented by Maria Augusta Cardador Francisco, and
the financial statements are incorporated by reference in this Base Prospectus.”
XIII. ANNEXES
38. References to article 90 of CIRC shall be replaced with references to article 97 of
CIRC.
XIV. LAST PAGE
39. “Merril Lynch Financial Centre” shall be deleted from the address of the Dealer Merril
Lynch International.
52
40. References to Deutsche Bank Aktiengesellschaft, as Dealer shall be understand as
follows:
“Deutsche Bank Aktiengesellschaft
Grosse Gallusstrasse 10-14
Frankfurt am Main,
Germany ”