New measures for the Spanish Banking System 4 February 2012 Madrid

2

The new measures are designed to clean up institutions’ problematic exposures to construction and real estate developers in Spain - particularly land – from their balance sheets…

… as well as to consider potential migrations from normal to problematic portfolios

As a reminder, BdE considers as the following problematic exposures:

Doubtful loans: Loans in which some installment has not been paid for a period of more than 90 days, and those exposures in which there are reasonable doubts as to total repayment under the terms agreed

Substandard loans: Loans showing some general weakness associated with the fact they are to a specific troubled group or sector or if weaknesses are apparent in certain operations, even if these operations do not qualify individually for classification as doubtful or write-off

Asset foreclosures: Assets ownership goes to the credit institutions, as a result of the application of these regular tools in a crisis situation such as the present. Supervisors prevent them from becoming potential mechanisms to defer the recognition of losses

The new measures

3

The measures are applied to the stock of legacy assets at 31.12.2011 …

… and not to new operations

It could be expected that new operations are subject to stricter lending standards. In this respect, note that the 2010 reform of the CBE 4/2004 already included different considerations in order to incentivise higher lending standards by institutions to this sector.

– For instance, it is considered that, as a general practice, financing the acquisition cost of land for its further urban development will not be higher than the 50% of the minimum between the appraisal value and the price registered in the public deed (escritura pública)

To avoid a negative impact on new real estate sector activity in future cycles

The new measures

148

87

15

73

0

20

40

60

80

100

120

140

160

180

200

Normal (46%) Problematic (54%)

Land

Housing under development

Rest (Finished housing,54%; foreclosed retail houses, 21%; Personal guarantee and others, 25%)

Exposure to construction and property developers, €bn

4

The new measures are particularly focused on land because their key objective is to eliminate the major uncertainty affecting the Spanish institutions’ balance sheets, that is the uncertainty associated with the value of land

The new measures

Value?

148

87

15

73

0

20

40

60

80

100

120

140

160

180

200

Normal Problematic

Land

Housing under development

Rest (Finished housing,54%; foreclosed retail houses, 21%; Personal guarantee and others, 25%)

Exposure to construction and property developers, €bn

5

The new measures

Specific provisions to

consider incurred losses in problematic assets, particularly in land

Capital add-on to consider valuation uncertainties regarding land and housing under development

General provisions to take into account potential

migration from normal to problematic portfolio

The measures are based on three complementary tools:

105 105

50

0

40

80

120

160

New measures From Jan 2008 to June 2011

Cleaning-up of bank balance sheets

6

1. Specific provisions

2. General provisions

3. Capital add-on

A figure of €50bn means a 5%

of Spanish GDP … on

top of the cleaning-up

already conducted by institutions

The new measures

€ 25bn

€ 10bn

€ 15bn

€ 50bn

15% GDP

22

17

66

0

20

40

60

80

100

120

Provisions charged to institutions' P&L

Reduction in general provisions

Provisions charged to reserves of institutions undergoing restructuring

Cleaning uo of bank balance sheets, Jan 2008 to June 2011€bn

7

Additional specific provisions: €25bn

Land related assets: provisions for this type of assets represent a 76% of total additional specific provisions

The new measures

LAND CBE 4/2004

Foreclosed 10% 1st year; 20% 2nd year; 30% 3rd year

Doubtful – past due 90 days

Provisions = [loan – 50% haircut appraisal value of the collateral]; to be set in one year from 25% to 100%

Rest of doubtful Minimum of 25% of the value of the loan

Substandard Minimum of 10% of the value of the loan

LAND New Measures

60% of the value of the loan

31% coverage

ratio

60% coverage

ratio

8

Additional specific provisions: €25bn

Housing under development: provisions for this type of assets represent a 12% of total additional specific provisions

(*) The exposure on-going under development classified as substandard is around €2bn

The new measures

HOUSING UNDER DEVELOPMENT CBE 4/2004

Foreclosed 10% 1st year; 20% 2nd year; 30% 3rd year

Doubtful – past due 90 days

Provisions = [loan – 50% haircut appraisal value of the collateral]; to be set in one year from 25% to 100%

Rest of doubtful Minimum of 25% of the value of the loan

Substandard Minimum of 10% of the value of the loan

HOUSING UNDER DEVELOPMENT New Measures

50% of the value of the loan

50% of the value of the loan or 24% for on-going developments (*)

27% coverage

ratio

46% coverage

ratio

9

Finished housing and other real estate collateral

Foreclosed: the new measures apply the same treatment as CBE 4/2004, but increasing the value of the provisioning coefficients: 10% (1st year); 20% (2nd year) and 30% (3rd year) to 25% (1st year); 30% (2nd year); 40% (3rd year) and 50% (4th year)

Doubtful and substandard: the new measures eliminate the exceptions for minimum provisioning requirements, that are set at 25% for doubtful and 20% for substandard

Foreclosed housing from households (first residence)

The new measures apply the same treatment, but expanding one year the provisioning coefficients: 10% (1st year); 20% (2nd year) and 30% (3rd year) to 10% (1st year); 20% (2nd year); 30% (3rd year) and 40% (4th year)

Other with personal guarantee

For those classified as substandard the minimum provisioning coefficient goes from 10% to 24%

These changes give greater incentives to sell the assets in the market

The new measures Additional specific provisions: €25bn

Other different from land and housing under development: provisions for this type of assets represent a 12% of total additional specific provisions

10

The new measures To sum up: specific provisioning requirements

New operations: CBE 4/2004 criteria are maintained, but coverage requirements for foreclosed assets will be 40% for the 4th year

11

The new measures Additional specific provisions: €25bn

The increase in specific provisions means a direct increase in coverage ratios

29 27 31

4346

60

010203040506070

Total problematic portfolio Housing under development

Land

CBE 4/2004 New Specific Provisions

Loan Coverage Ratio, %

12

The new measures General provisions: €10bn

€10bn represents a 7% of the construction and real estate developers normal portfolio

This provision is established to take into account that there may still be the possibility that migration to the problematic portfolio of construction and real estate developers exposures which are currently classified as normal

Collective assessment for impairment

This is for specific portfolios

It is not a reform of the present Spanish dynamic provision

This one-off provision does not enter into the definition of regulatory capital

13

The new measures General provisions: €10bn

When a loan classified as normal is re-classified to the problematic portfolio, the amount accumulated in this fund of provisions can be used as much as necessary depending on the provisioning requirements resulting from the re-classification

These potential re-classifications will not have an impact on the P&L until the provision fund constituted as a result of the application of the new measures is completely depleted

14

The new measures Capital add-on: €15bn

The capital add-on is computed for land and housing under development classified in the problematic portfolio (*) over the ‚capital principal‛ minimum requirements of 8% / 10%

It takes into account valuation uncertainty regarding this type of assets increasing their coverage: +20pp for land related assets and +15pp for housing under development in the problematic portfolio (*)

(*) Except on-going housing under development classified as substandard that represents an exposure around €2bn

40

50

60

70

80

90

Land Housing under development

Specific provisions

Specific provisions + capital add-on

Coverage ratios considering the capital add-on, %

15

The new measures Summing-up

The total estimated amount of the new measures is €50bn of additional cleaning-up

Specific provisions: +€25bn; Capital add-on: +€15bn; General provisions: +€10bn

The measures also consider potential migration from the ‘normal’ portfolio to the ‘problematic’ portfolio

29 27 3143

46

605365

80

0102030405060708090

Total problematic portfolio Housing under development

Land

CBE 4/2004 New Specific Provisions New Specific Provisions + Capital Add-on

Coverage Ratio, %

16

The new measures

To compute a decline in the prices of the collateral compatible with a given level of coverage, it is necessary to consider the loan to value ratio (LTV)

EXAMPLE:

A loan of €60 where the value of the collateral is €100 has a LTV of 60%: that means that the value of the loan is protected against an initial decline in the value of the collateral of 40%

A loan of €60 with a LTV of 60% and a coverage ratio of 50% means that the implicit decline in the value of the collateral is 70%

100 60 30

INITIAL VALUE OF THE COLLATERAL

INITIAL VALUE OF THE LOAN

VALUE OF THE LOAN NET OF PROVISIONS

LTV = 60% Coverage Ratio = 50%

IMPLICIT DECLINE IN THE VALUE OF THE COLLATERAL = 70%

MAXIMUM DECLINE IN PRICES (VALUE = 0)

NO DECLINE IN PRICES

17

The new measures Considering the coverage of land related assets (80%) and the average LTV of the portfolio, the implicit decline in land prices is, on average, 87%

For housing under development the decline in the implicit value of the collateral is, on average, 82%

-82

-87

-100

-80

-60

-40

-20

0

Housing under development Land

At present

New Measures

Decline in the value of land and housing under development compatible with new coverage ratios, considering the average LTV of the portfolios %

18

The new measures The impact of the measures is a one-off: the objective is to eliminate uncertainty regarding banks’ balance sheets, and particularly the value of land related assets value

€50bn is the initial impact: in order to assess this figure it is necessary to take into account

Possible merger and acquisitions may change provisioning figures. Under IFRS

Need to identify the acquirer and the acquiree

The acquiree must put its balance sheet at fair value

Under this context, (part of) the adjustment will go directly against own funds

No final data for year-end 2011, and in fact all calculations are based on June 2011 figures

This is particularly relevant because many institutions have announced a strong increase in provisioning in 4Q-11

The position of each particular institution needs to be considered

BE transparency requirements have obliged institutions to disclose risks and coverage to the construction and real estate sector

For the global assessment of the impact the asset protection schemes given to CCM, Cajasur and CAM need to be factored in

19

The new measures

Timeline if there is not an integration process during 2012

3rd of February of 2012: approval of RD-L

31st of March of 2012: presentation of a plan to comply with the measures

• BdE approval within 15 working days

Year-end 2012: compliance with the measures

In order to facilitate these processes the FROB can buy shares of the institutions. These shares must be sold through competitive procedures in, at a maximum, 3 years

20

The new measures Timeline if there is an integration process during 2012

3rd of February of 2012: approval of RD-L

31st of May of 2012: presentation of an integration plan

• Approval by the Ministry of Economy in one month

12 months after the approval of the integration plan: compliance with the measures. The integration must be operative since 1.1.2013 at the latest

Conditions for the integration: As a general rule, the resulting entity must have a balance sheet which is 20% higher than the largest institutions participating in the process Improvements in corporate governance Objectives on lending to households and SMEs Objectives on reducing exposure to construction and real estate developers IPS type agreements not contemplated

FROB can provide funds to facilitate the processes: The new RD-L opens the possibility for the FROB to instrument the funds through Cocos Convertible in shares in 5 years FROB capital from €9bn to €15bn, reducing its leverage

21

The new measures Other relevant measures included in the RDL are those related to the rules for loans and credits other than mortgages to be considered as collateral in Central Bank operations

This set of measures respond to accommodate the measures in order to increase collateral availability recognition announced by the ECB on 8 December 2011

The ECB measures, and particularly the 3 years LTRO has improved the liquidity situation of the banking sector reducing funding tensions

Looking ahead, at some point the huge amount of liquidity in the hands of banks will come back to the markets, but in any case the re-opening of wholesale markets requires:

Regaining confidence for Europe

National authorities and institutions solving potential weaknesses

Opening of interbank markets

22

Conclusions There were basically 4 uncertainties regarding the Spanish banking sector:

Uncertainties regarding the corporate model of savings banks have been resolved: from 45 savings banks to 15 commercial banks

Uncertainties regarding balance sheet cleaning-up have been resolved: €50bn of additional cleaning-up, meaning a coverage ratio for land related assets of 80%, that is, 87% decline in land prices

Uncertainties regarding funding have been alleviated and funding tensions reduced after the ECB 3 year LTRO

Uncertainties regarding the impact of the negative macro outlook in asset quality are present but contained, as a moderate increase in NPL could be expected

23

Background material

GDP projections and NPL evolution

Housing prices

Government net borrowing and Nation net borrowing

Exports

Foreign claims of the Spanish banking sector

24

Background material GDP projections and NPL evolution

-5

-4

-3

-2

-1

0

1

2

3

4

50

10

20

30

40

50

60

dic

-06

mar

-07

jun

-07

sep

-07

dic

-07

mar

-08

jun

-08

sep

-08

dic

-08

mar

-09

jun

-09

sep

-09

dic

-09

mar

-10

jun

-10

sep

-10

dic

-10

mar

-11

jun

-11

sep

-11

dic

-11

mar

-12

jun

-12

sep

-12

dic

-12

mar

-13

jun

-13

sep

-13

dic

-13

%€b

n

Year-on-year change in doubtful assets. Other than construction and real estate

Year-on-year change in doubtful assets. Construction and real estate sectors

Year-on-year rate of change in GDP

Year-on-year rate of change in GDP. 2012-average forecast

Year-on-year rate of change in GDP. 2013-average forecast

NEGATIVE RATE OF CHANGE OF GDP

2012E 2013E

25

Background material Housing prices (1/3)

-3,2

-10,2

-15,1

-22,4-25

-20

-15

-10

-5

0

2008 2009 2010 2011

Real housing prices acumulated adjustment since the peak (year 2007), %

PROVINCIAL BREAKDOWN OF HOUSE PRICES ADJUSTMENT

Source: Ministerio de Fomento and Banco de España.

-10,6

-15,8

-21,7

-23,7

-21,2

-10,4

-19,6

-18,6

-20,9

3,1

-17,5

-21,8

-7,5

-12,5

-13,7

-4,7

-15,7

-15,7

-28,0

-11,2

-24,4

-18,3

-10,4

-10,9

-12,0-18,1

-8,8

-24,8

-27,6

-23,9

-17,3

-7,2

-11,3

-13,2

-25,4

-17,2

-16,8

-17,5

-14,3

-23,3

-13,7

-5,5

-18,2

-8,9

-24,3

-21,0

-16,9

-17,8

-14,7

-26,1

-6,7

0,0

MAXIMUM FALL - PERCENTILE 25

PERCENTILE 25

PERCENTILE 75 - MINIMUM FALL

CHANGE IN NOMINAL TERMS FROM 2008 PEAK TO Q4-2011 (%). NATIONAL AVERAGE = -19%

0

200

400

600

800

1000

1200

04 05 06 07 08 09 10 11

TOTAL

NEW HOUSING

SECOND-HAND HOUSING

DEMAND. Before a notary(in last twelve months)

Thousands

26

Background material Housing prices (2/3)

80

100

120

140

160

180

200

220

240

260

280

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Ireland (a) Spain

USA (Case-Shiller) (a) UK (Nationwide)

France (a)

Index 1997=100

HOUSING PRICES (real terms)

(a) Data for 2011 refers to Q1-Q3 average.

2010

2011

65

70

75

80

85

90

95

100

105

110

115

120

0 1 2 3 4 5 6 7 8 9 10

Years subsequent to peak in real prices

1979 1991 2007

SPAIN. THE ADJUSTMENT OF HOUSING PRICES (In real terms)

COMPARISON BETWEEN THE CURRENT AND PREVIOUS CYCLES

Real p

rices:

peak y

ear

= 1

00

27

Background material Housing prices (3/3)

26

33

39

52

53

55

79

0% 20% 40% 60% 80% 100%

US

JP

UK

FR

IT

DE

SP

Real Estate Other non-financial assets Financial assets

Households asset split (% of total assets)Source: Oliver Wyman

0

5

10

15

20

25

30

35

Irela

nd

Neth

erla

nd

s

Unite

d K

ingd

om

Austra

lia

Fra

nce

Norw

ay

Denm

ark

Belg

ium

Sp

ain

Sw

ed

en

Italy

Fin

land

Germ

any

Percentage increase in house proces not attributable to fundamentals, IMF April 2008

28

Background material Government net borrowing and Nation net borrowing

-4,5

-11,2

-9,3

-8,1

-4,4

-3

-12

-10

-8

-6

-4

-2

0

2008 2009 2010 2011E 2012E 2013E

Government net borrowing as % of GDP

-9,2

-4,7-4 -3,7

-1,4

-12

-10

-8

-6

-4

-2

0

2008 2009 2010 2011E 2012E 2013E

National economy's net borrowing as % of GDP

0

29

Background material Exports

60

70

80

90

100

110

120

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 JAN-SEP

SPAIN FRANCE GERMANY ITALY

1998 = 100

EXPORT MARKET SHARES OF GOODS (REAL TERMS)

SOURCES: Eurostat and IMF.

30

Background material Foreign claims of the Spanish banking sector

0

2

4

6

8

10

Unite

d K

ingd

om

Unite

d S

tate

s

Bra

zil

Mexi

co

Port

ugal

Germ

any

Italy

Fra

nce

Pola

nd

Neth

erland

s

Turk

ey

Sw

itzerland

Chin

a

Irela

nd

Luxe

mb

ourg

Consolidated Foerign Claims of Spanish banks as % of consolidated total assets of the Spanish deposit institutions. September 2011