Annual Report 2009 Banco Gallego

2009 ANNUAL REPORT
2009 ANNUAL REPORT
2009 ANNUAL REPORT
TABLE OF CONTENTS
Letter from the Chairman Financial highlights 2009 Management Report Evolution of the world economy Most important highlights for 2009 and prospects for 2010 Annual accounts Audit report Annual Corporate Governance Report Further information 5 9 13
37 43 175 179 211
Letter from the Chairman
Dear Shareholders, The year 2009 was shadowed by the global economic downturn, one of the deepest and longest in the history of Europe. The first half of the year saw one negative growth result after another in the main developed countries. This led to unprecedented aid packages from governments and central banks to stimulate the economy. The adopted measures stabilized activity in the worlds leading economies and stopped their free-fall. This, together with a boost in confidence and a tentative revival in trade, prompted more positive vibes regarding the word economys growth prospects for 2010. Growth rates are expected to vary widely among countries and regions. The GDP is expected to rise 2% in developed economies, while activity will grow 6% in emerging countries due to lively domestic demand. In keeping with the severe downtrends with which the world economy has had to grapple, Spain ended 2009 in recession for the second year running. During this period, the GDP shrank by 3.6%, the most dramatic fall for half a century. The main factors behind this shrinking were the heavy 5% fall in household consumption and the 15.3% collapse in investment, in terms of property and goods and equipment. In such circumstances the recovery process in our country will be slower and more fragile than our neighbouring countries in Europe. Economic growth will be slowed down by the rise in unemployment, which at the end of 2009 was 18.8% of the working population, caused by the heavy public deficit which reached 12%, and the severe crisis in the property sector. In spite of this background, which was particularly complex for the financial sector, Banco Gallego posted strong economic results at the end of 2009, with a profit before tax of 17.05 million, up 12.54% on the previous year. As regards the main margins, all of them recorded significant increases. The net interest margin rose by 28.42% compared to last year, the gross interest margin by 14.66%, exceeding 146 million, and net interest income by 76.56%, reaching 41.73 million. This was brought about by active management of prices and the 8.24% increase in turnover, which recorded 7.97 billion. The exhaustive cost restraint plan, in order to adapt to the current market context, has led us to reduce personnel and administration costs by 1.67% versus last year, amounting to 90,785 thousand. Strenuous efforts to at all times maintain a balance risk in keeping with the companys experience and capacity meant that Banco Gallego ended 2009 with a 3.94% arrears rate. This was considerably better than the average in the financial sector. In accordance with the caution required in the current economic situation, this allowed us to allocate 43 million to reinforce insolvency provisions and other loss provisions, which totalled 133 million by the end of the year. It therefore represents a significant boost to the Banks credit rating and coverage ratio, which will push confidence levels far enough up to face the year 2010, based on a 13.46% current rating, which is 14% up on 2008, an 8.21% TIER 1 rating and a coverage ratio of over 71% more than 105% excluding mortgage securities.
LETTER FROM THE CHAIRMAN
2009 ANNUAL REPORT
The results recorded during the year have allowed us to pursue the strategic objectives of improving and optimizing our technology platform, with excellent results. We also continued with our efforts in the process of adapting to Basel II, which we started in previous years, and improvements in the procedures to monitor compliance with MIFID. During 2009 we improved the resources, tools and systems available in the monitoring and follow-up areas to facilitate management in a difficult economic climate. The upgrades in the NPL and arrears position management application are worthy of mention. The Pricing project also deserves particular mention. This will give our bank a reporting system that will allow us to provide a better and more customized service to our customers. This year we also undertook a major corporate transaction. With Casers involvement, the company Banco Gallego Vida y Pensiones was set up in order to provide a better and more comprehensive customer service and to create more value for shareholders. We continue to be committed to the development of our workers, the driving force behind competitiveness, providing more than 600,000 hours of training and fostering the use of on-line training through the Training Camp. Finally, I would like to thank everyone who works for Banco Gallego once again for their dedication and commitment, and hope that we will continue to create a stronger and more professional bank in the future. I would like to give special mention to our shareholders, and their vital support, which they have proven on so many occasions, and to our customers who trust in Banco Gallego and its growth prospects. Kind regards,
Juan Manuel Urgoiti
LETTER FROM THE CHAIRMAN
Financial highlights
Balance sheet
2009
Equity Gross loans and receivables Customer funds 258,126 3,472,690 3,168,319
In thousands of euros
2008
248,658 3,456,650 3,016,460
% Variation
3.81% 0.46% 5.03%
Profit/loss
2009
Interest income Gross income Margin before provisions PBT 110,454 146,328 41,729 17,048
2008
86,009 127,622 23,642 15,149
% Variation
28.42% 14.66% 76.50% 12.54%
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FINANCIAL HIGHLIGHTS
2009 ANNUAL REPORT
Gross loans and receivables

4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2006 2007 2008 2009
In thousands of euros 3,199,976 3,472,690
3,456,650
2,676,717
Managed volumes
8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 2006 2007 2008 2009
In thousands of euros 7,657,957 6,481,639 7,313,348

7,970,440
Customer funds
3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2006 2007 2008 2009 2,606,050 3,023,646 3,016,460
3,168,319
Profit after tax for the year

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2006 2007 2008 2009 11,483 13,672 12,608 11,676
FINANCIAL HIGHLIGHTS
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2009 Management Report

In accordance with the Spanish Companies Law and the Code of Commerce, the Board of Directors of Banco Gallego, S.A., at a meeting on 4 February 2010, drew up the annual accounts and management report for Banco Gallego for FY09, as well as the proposal for allocation of profit and surplus balances. All of the Directors signed the financial statement and management report and the audit company Deloitte, S.L. subsequently checked them.
EQUITY
At the end of FY09, Banco Gallegos equity totalled 258,126 thousand, once the profit allocation proposed to the General Shareholders Meeting had taken place. This represented a 69.68% growth versus FY05. Following the 2009 merger between Banco Gallego (acquiring company) and Gest21, S.L. Unipersonal and Galeban Energa S.A. Unipersonal (merged companies), the Banks reserves rose by 3,337 thousand. Over the past four years, Banco Gallegos reserves have multiplied by 2.03 and total equity has increased by 69.68% with the consequent evolution in growth capacity. Following the profit allocation proposed to the General Shareholders Meeting, Banco Gallego will have total reserves of 139,084 thousand, representing a 7.30% increase on last year.
Evolution of equity
Variation 2009/2008 2009

Capital Reserves Legal Voluntary and other Share premium Revaluation 119,042 139,084 12,824 71,884 50,806 3,570
2008
119,042 129,616 9,995 65,245 50,806 3,570
2007
83,440 85,532 8,734 57,906 15,322 3,570
Amount
9,468 2,829 6,639
%
7.30 28.30 10.18
Total equity
258,126
248,658
168,972
9,468
3.81
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2009 MANAGEMENT REPORT
2009 ANNUAL REPORT
Evolution of capital and reserves

300,000
250,000
248,658
129,616
258,126
139,084
200,000
150,000
152,123
68,683
159,705
76,265
168,972
85,532
100,000 83,440 50,000 83,440 83,440
119,042
119,042
0 2005 2006 2007 2008 2009
Reserves
Capital
Since FY03, Banco Gallego, with approval from the General Shareholders Meeting, has shared out dividends among its shareholders. The dividend shared out in FY09, charged to FY08, was 0.29 gross per share. As far as computable equity is concerned, calculated in accordance with the regulations established by the Bank of Spain, as at 31 December 2009, this amounted to 435,218 thousand. The minimum equity amount required is 258,765 thousand euros, meaning that the equity surplus at the 2009 year-end totals 176,453 thousand. In accordance with the foregoing, the Banks BIS ratio as at 31 December 2009 is 13.46%.
Shareholder structure
The Banks total number of shareholders was 504 as at 31 December 2009. The most important shareholder is Caixa de Ahorros de Vigo Ourense e Pontevedra (Caixanova), which owns 49.84%. There are 90 shareholders owning more than 1,000 shares, totalling 99.71% of the share capital.
AVERAGE TOTAL ASSETS

The Average Total Assets at the 2009 year-end amounted to 4,201,619 thousand, compared to 4,052,436 thousand for the previous year. This represents growth in absolute figures of 149,183 thousand, equivalent to 3.68% in percentage terms. Based on the evolution of equity, an intensive commercial management and the network effort, the Banks average total assets have increased by 78.54% since the year 2005, which represents an increase of 1,848,336 thousand euros and a 16.26% average annual growth rate.
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Evolution of average total assets

4,500,000 4,000,000 3,500,000
3,862,116
4,052,436
4,201,619
3,133,523
3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2005 2006 2007 2008 2009
2,353,283
Managed turnover
Managed turnover in FY08 amounted to 7,970,440 thousand, which compared to the previous year represents 8.98% growth, equivalent to a 657,092 thousand increase. Since 2005 the Banks managed turnover rose by 57.10%, i.e. a 2,897,024 thousand increase.
Comparison of managed volumes
8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 2005 2006 2007 2008 2009
In thousands of euros 7,657,957 7,313,348 6,481,639 7,970,440
5,073,416
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2009 ANNUAL REPORT
Balance sheet total

As at 31 December, the balance sheet total was 4,223,635 thousand, representing a 1.00% fall versus the previous year. These results represent a 1,477,458 thousand growth versus FY05, i.e. a 53.80% increase and 11.84% average annual growth.
Evolution of Balance sheet total figures
4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2005 2006 2007 2008 2009
In thousands of euros 4,266,322 3,941,837 4,223,635
3,511,682 2,746,177
Evolution of Balance sheet total ratios

22,000
In thousands of euros 20,913 20,806 4,474
5,000 4,750 4,500
20,182
19,250 16,500 13,750 11,000
20,111
16,829 4,271
4,186
4,250 4,000
3,702
8,250 5,500 2,750 0 2005 2006
3,966
3,750 3,500 3,250 3,000 2007 2008 2009
Per branch
Per employee
In FY09, productivity per employee rose by 203 thousand compared to the previous year.
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MANAGED FUNDS
As at 31 December 2008, the total borrowings that Banco Gallego managed, which are shown in the balance sheet, amounted to 3,168,319 thousand, which represents year-on-year growth of 151,859 thousand. A comparison of the 2009 results with the 2005 results gives a 52.42% upturn, which represents an increase of 1,089,592.
2009 Amount
Public administrations Resident sector Current accounts Saving accounts Fixed-term deposits Non-resident sector Current accounts Term Deposits Other accounts Subordinated liabilities Customer deposits Temporary transfer of assets Special and proceeds accounts Customer funds Valuation adjustments (*) 116,477 2,677,104 411,488 274,146 1,991,470 99,269 19,344 78,838 1,087 201,000 3,093,850 32,794 25,177 3,151,821 16,498
2008 %
3.68 84.50 12.99 8.65 62.86 3.13 0.61 2.49 0.03 6.34 97.65 1.04 0.79 99.48 0.52
Amount
125,824 2,358,055 328,978 235,657 1,793,420 98,360 15,309 82,365 686 177,000 2,759,239 201,079 31,689 2,992,007 24,453
%
4.17 78.17 10.91 7.81 59.45 3.26 0.51 2.73 0.02 5.87 91.47 6.67 1.05 99.19 0.81
% change
(7.43) 13.53 25.08 16.33 11.04 0.92 26.36 (4.28) 58.45 13.56 12.13 (83.69) (20.55) 5.34 (32.53)
Total customer funds

(*) Refers to accrued interest, commissions and micro-hedging transactions
3,168,319
100.00
3,016,460
100.00
5.03
This growth was recorded in all of the items in the resident sector, a heading which represents 84.50% of the customer funds total, posting a 13.53% growth, i.e. 319,049 thousand up on the previous year.
Total managed funds

The funds that Banco Gallego managed that are not included on the balance sheet due to being investment funds and provident and savings funds (pension schemes) amount to 863,055 thousand. If we consider the amounts from investment, provident and savings funds and other financial instruments that are not shown on the Banks balance sheet, the total managed funds amounts to 4,031,374 thousand. This is 9.14% down on the 2009 results, which is equivalent in absolute terms to a fall of 337,543 thousand in FY09.
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2009 ANNUAL REPORT
2009 Amount
Total customer funds Off-balance total: Investment Funds Provident and savings Other financial instruments 3,168,319 863,055 485,343 49,757 327,955
2008 Amount
3,016,460 677,371 363,067 39,284 275,020
% variation
5.03 27.41 33.68 26.66 19.25
Total managed funds
4,031,374
3,693,831
9.14
In FY09, after the necessary authorization, Banco Gallego issued subordinate debt amounting to 50,000 thousand, fully subscribed, completing said issue on 29 September 2009. The issue period is ten years, with the possibility of Banco Gallego redeeming them early on any due date from the fifth year onwards.
Evolution of customer funds
3,500,000
3,023,646
3,000,000
3,168,319 3,016,460
2,606,050
2,500,000
2,078,727
2,000,000 1,500,000 1,000,000 500,000 0 2005 2006 2007 2008 2009
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Evolution of managed customer funds
Savings accounts 282,711 7.04%
Current accounts 503,813 12.55%
Other financial instruments 327,955 8.17%
Provident and savings 49,757 1.24% Term deposits 2,106,326 52.46% Investment funds 485,343 12.09% Special and proceeds accounts 25,177 0.63% Subordinated funds 201,000 5.00% Does not include valuation adjustments. Temporary transfer of assets 32,794 0.82%
Classification percentages by amounts of customer deposits in euros

No. of accounts
Up to 6,010 euros 6,011 euros to 30,050 30,051 euros to 60,101 More than 60,101 68.07% 23.69% 4.81% 3.43%
Amount
6.97% 25.43% 15.62% 51.98%
Total
100.00%
100.00%
LOANS AND RECEIVABLES

At the end of FY09, loans and receivables amounted to 3,472,690 thousand, which is 16,040 thousand up on the previous year. If we deduct insolvency funds and interest and fee adjustments, we can calculate the net loans and receivables, which at the end of 2009 was 3,382,790 thousand, slightly higher (2,524 thousand) than the previous year.
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2009 ANNUAL REPORT
Evolution of typical loans and receivables

4,000,000 3,500,000 3,000,000 2,500,000
3,456,650 3,199,976 2,676,717 2,080,170
3,472,690
2,000,000 1,500,000 1,000,000 500,000 0 2005 2006 2007 2008 2008
Net loans and receivables

2009 Amount
Public administrations Resident sector credit Commercial loans Secured loans Other long-term loans Loans on demand and miscellaneous Non-performing loans Non-resident sector credit Secured loans Other long-term loans Loans on demand and miscellaneous Non-performing loans 16,356 3,436,317 156,498 2,126,458 902,764 104,890 145,707 20,017 14,923 3,393 415 1,286
2008 %
0.47 98.95 4.51 61.23 26.00 3.02 4.19 0.58 0.43 0.10 0.01 0.04
Amount
16,433 3,418,375 211,635 1,993,286 1,020,321 114,455 78,678 21,842 16,600 4,145 697 400
%
0.48 98.89 6.12 57.66 29.52 3.31 2.28 0.63 0.48 0.12 0.02 0.01
% change
(0.47) 0.52 (26.05) 6.68 (11.52) (8.36) 85.19 (8.36) (10.10) (18.14) (40.46) 221.50
Gross loans and receivables

Allowance for impairment losses Interest and fee adjustments
3,472,690
(88,387) (1,513)
100.00
3,456,650
(76,633) 249
100.00
0.46
15.34 (707.63)
Net loans and receivables
3,382,790
3,380,266
0.07
The resident sector carries the most weight in loans and receivables, reaching 3,436,317 thousand as at 31 December 2009.
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Secured loans, which recorded 2,141,381 thousand, represent 61.66% of gross loans and receivables, which is 6.54% up on the previous year, in spite of the slowdown in mortgages caused by the drop in the sale of houses. The credits and loans heading, with 804,372 thousand, represents 23.16% of the total gross loans and receivables. Since 2005, the loans and receivables heading has grown constantly, increasing by a total of 1,392,520 thousand (66.94% in relative terms).
Allocation of gross loans and receivables
Business portfolio 156,498 4.51% Non-performing loans 146,993 4.23% Loans on demand and miscellaneous 109,221 3.15% Leasing 114,225 3.29% Secured loans 2,141,381 61.66%
Credits and loans 804,372 23.16%
In accordance with the periods until their maturity, loans and receivables in euros have the following percentage breakdown:
2009
Up to 3 months Between 3 months and 1 year Between 1 and 5 years More than 5 years 5.79% 12.62% 14.99% 66.60%
Total
100.00%
Out of the Banks total gross loans and receivables, as at 31 December 2009, 24.42% was fixed rate and the remaining 75.58% was variable rate. The Bank strives to keep a balanced risk in accordance with the organisations experience and skills, pursuing the fundamental aims of solvency, profitability and liquidity.
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2009 ANNUAL REPORT
Allocation by purpose of loans used to finance production activities -resident sector

Chemical and metallurgy 3.64% Other industries 10.59% Real estate activities 27.64%
Other services 19.85%
Transport and communications 4.33% Hotel and catering 1.48% Trade and repairs 5.43% Construction 21.78%
Agriculture, livestock and fishing 2.78% Food and drinks 2.48%
NON-PERFORMING LOANS
In keeping with the current economic climate, and like in the rest of the financial sector, Banco Gallegos arrears have risen, although to a lesser extent. As at 31 December 2009, non-performing loans recorded 57,396 thousand, of which 50,306 were secured loans. On that date, the insolvencies funds totalled 112,804 thousand, of which 107,381 thousand related to loans and receivables and shares and 5,423 thousand to corporate risks.
Evolution of insolvencies funds
120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2005 2006 2007 2008 2009
112,804
83,055 79,122 64,732
45,296
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As at 31 December, non-performing loans represented 3.94% of debt instruments, with 71.68% hedging of the total non-performing loans. It should be noted that at the 2009 year-end, hedge funds were equivalent to 43.70% of Grupo Banco Gallegos equity.
OPERATIONAL AREAS Technology and processes

The bank continues to focus on improving and optimising the alignment of people, processes and technology in order to guarantee efficiency and the established service levels, adapting investment to the current state of technology, which is developing at a fast pace, and to the economic situation that we are facing. Once the set strategic goals have been achieved, we must look at developing our platform in order to continue to satisfy our internal customers as a distinguishing feature of external customer satisfaction. The most important processes are classified in the following areas of our business: compliance with regulations, internal control, new channels, banking platform, customer relationships, management information, and infrastructure improvements. As part of compliance with regulations, the Bank continues taking measures to adapt to the Basel I Accord started in previous years, in order to fulfil the Bank of Spains Circular 3/2008. The bank has also focused on several improvements to the procedure to monitor compliance with MIFID, including compliance with the requirements of Circular 6/2008 and adaptation to other regulatory amendments. During 2009 we continued to work towards improving the resources, tools and systems available in the monitoring and follow-up areas to facilitate management in a difficult economic climate. The work focused on two areas: risks and other support applications. Within risks, the upgrades in the business applications most exposed to the current situation are worthy of mention: NPL and arrears position management; implementation of the new integrated guarantee management system and adaptation of risk information systems, which provide information to help with decision making. Regarding support applications, the most noteworthy measures include implementation of the cost management and control purchasing system -allowing the process to be upgraded and automated- and the tax reporting project. Within the new channels area, work has been aimed at taking out bank products and increasing the existing functions to consolidate Digital Banking. As regards the process of taking out products, a significant step forward has been made by including fixed-term deposits. The most important new functions feature inclusion of the pension scheme and insurance position, access to tax information, wire transfers via the Bank of Spain (OMFs) and the inclusion of all of the Banks statements reducing queries and requests at branches and improvements to delivery and management information in standard notebooks. In the security area, constant updates are being made to mitigate potential risks, with the inclusion of upgrades to anti-phishing systems and the launch of the code card for all customers who carry out online transactions.
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2009 ANNUAL REPORT
The years results have been positive, with an 11% annual increase in active contracts, 22% in customer access, 5% in number of transactions undertaken and 114% in statement queries, with a total of 46,334 statement queries in one month. The developments in the banking platform are on schedule, with more functions being added to the new financial terminal which owns 80% of the most significant functions and business processes. The process of migrating application to the new platform (leasing, settlements, foreign and CIRBE) continues. The CRM tools are also still being upgraded. During 2009 the Pricing product was launched, which will provide the Bank with an information system that will allow it to give a personalised price to customers. The basic functions are: implementation of a calculation system that users can configure, performance of calculations at the customer and product level and inclusion of the information in the process of taking out products. The necessary developments have also been made to the Commercial management and support tool Ulysses. The final area of improvement in technology is the constant updating of the technological architecture used as business support, with the aim of guaranteeing continuity and security. Progress continues to be made towards process management in order to help improve the Banks efficiency ratio, with two main areas of action: rationalisation of network processes and standardisation of processes in central services.
Human resources
Banco Gallego hires people who identify with the Banks process, that is, employees who achieve results and contribute added value through their work. People are the most important aspect for our company, and we need to invest in them coherently and strategically. During 2009, training was one of the keys to boosting competitiveness and a way of integrating each of our workers in the company. Overall, 62,500 hours of training were taught during the year. To ensure the best results and efficiency, the use of online training BG Training Camp was promoted, as a way of allowing flexibility and guaranteeing knowledge acquisition. In relation to classroom and online training the asset managers must be mentioned, who continue to strive to update their knowledge and boost service quality, being acknowledged with a official certificate and also taking part in maintenance training sessions. Our recovery specialists have received specific training as a group. The reserves (graduates who have potential but no experience) have completed a thorough training plan, at the end of which the Bank and Alcal University awarded them a qualification. Due to current flexibility and adaptation requirements, special attention has been paid to the leaders, as key players to achieve results through their teams. We use a state-of-the-art method with our executives which combines classroom training, set tasks at their workstation and knowledge sharing and thinking meetings in teams. We also use the personal coaching method. This allows our leaders to develop their management skills: team work, people development, people management and leadership. Human resources has worked individually with some employees to try to make the companys goals compatible with their personal interests. An early retirement system was launched, as well as a partial retirement system for people who, after a long
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career, have expressed an interest in continuing to work with Banco Gallego at a reduced level of commitment, allowing them to enjoy more personal time. More progress has been made in the field of workplace risk prevention, resulting in improved conditions for employees in that area.
Branches
As at 31 December 2009, Banco Gallegos branches totalled 203. These are broken down by autonomous region as follows:
Autonomous region
Galicia Madrid Castilla y Len Pas Vasco Valencia Andaluca Catalua Asturias Castilla-La Mancha Aragn Murcia Navarra Baleares La Rioja Cantabria
No. Branches
135 31 6 5 5 4 4 3 3 2 1 1 1 1 1
Total
203
The Premier Banking channel ended 2009 with a total of 9 branches (1 in Catalonia, 4 in Galicia and 4 in Madrid).
GROUP COMPANIES
As at 31 December 2009 Banco Gallegos direct or indirect shareholdings in Group companies totalled 10,623, with the following breakdown:
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2009 ANNUAL REPORT
Banco Gallego, S.A.
Galeban 21 Comercial, S.L.U. 100%
Galeban Gestin de Riesgos, S.A. 100%
Gest21 Inmobiliaria, S.L.U. 100%
Gallego Preferentes, S.A. 100%
Elica Galenova, S.L. 33.33%
Inmobiliaria Valdebebas 21, S.L. 27.28% Sociedades Fotovoltaicas (17 companies) 100% Sociedad Fotovoltaica (1 Company) 50.00% Adara Renovables, S.L. 34.00% Casiopea Energa 1-19, S.L. (19 Companies) 100% Boreal Renovables 14-19, S.L. (6 Companies) 100% Villacarrilla FV, S.L. 100.00% Luzentia Fotovoltaica, S.L. 25.92%
Cantabria Generacin S.L. 50.00%
Bco. Gallego Vida y Pensiones, S.A. de Seguros y Reaseg., S.U. 50.00%
Filmanova, S.L. 14.73%
Visualmark Internacional, S.L. 20%
Gala Domus, S.A. 50%
Edificio Veganorte, S.L. 8.48% Verum Inmobiliaria Urbanismo y Promocin, S.A. 92% Verum Carabanchel, S.A. 69%
Filmanova Invest, S.A.U. 100.00%
Metalplast C.F.E. S.L. 20%
Maewo Inversiones, S.L. 48%
Galenova Sanitaria, S.L. 50%
Decovama 21, S.L. 20.30%
Leva-Yorma, S.L. 49% CSR Inversiones Sanitarias Sur, S.A. 8.45%
Ribera Casares Golf, S.L. 49% Inversiones Valdeapa 21, S.L. 15.80%
Petrus y Buena Gestin, S.L. 20% Gest Galinver, S.L. 84.55% Inmobiliaria Valdebebas 21, S.L. 13.64%
Fegaunin, S.A. 48%
Enerfn Enervento, S.A. 30% Alarde Sociedad Energa, S.A. 51% Ondasol Energa S.L. 1% Azimut Energa S.L. 1% Planasol Energa S.L. 1% Solnova Energa S.L. 1% Solarana Energa S.L. 1% Tornasol Energa S.L. 1% Solaqui Energa S.L. 1%
Solgomar Energa, S.L. 50% Ondasol Energa, S.L. 99% Planasol Energa, S.L. 99% Solarana Energa, S.L. 99% Solaqui Energa, S.L. 99%
Fotonova Energa, S.L. 100% Azimut Energa, S.L. 99% Solnova Energa, S.L. 99% Tornasol Energa, S.L. 99%
Desarrollos Urbansticos SAU 6, S.L. 2% Bajo Almanzora de Desarrollos Inmobiliarios, S.L. 36.28% Gest Madrigal, S.L. 100%
Berilia Grupo Inmobiliario, S.L. 40% Agraria del Guadarrama, S.L. 33%
Pemapro, S.L. 49%
Inmobiliaria Panaderos 21, S.L. 15.01% Arraimat Peninsular, S.L 7.42%
Inveran Gestin, S.L. 100%
The information about the aforementioned companies is given in more detail in the Annual Report.
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INDIVIDUAL STATEMENT OF INCOME

The individual statement of income for 2009 recorded a profit before tax of 17,048 thousand, which is 1,899 more compared to 2008, i.e. an annual increase of 12.54%.
Amount 2009
Interest and similar income Interest and similar charges 209,982 99,528
Variation 2008
231,305 145,296
Absoluta
(21,323) (45,768)
%
(9.22) (31.50)
Interest income
Return on equity investments Commissions received Commissions paid Gains/losses on financial assets and liabilities (net) Exchange rate differences Other operating income Other operating costs
110,454
1,815 21,943 1,498 10,153 371 4,082 992
86,009
6,808 28,277 2,034 7,241 289 2,378 1,346
24,445
(4,993) (6,334) (536) 2,912 82 1,704 (354)
28.42
(73.34) (22.40) (26.35) 40.22 28.37 71.66 (26.30)
Gross income
Personnel costs General administration costs Depreciations
146,328
59,784 31,001 13,814
127,622
59,885 32,418 11,677
18,706
(101) (1,417) 2,137
14.66
(0.17) (4.37) 18.30
Margin before provisions

Provisioning expense (net) Impairment losses on financial assets (net) Other gains and losses
41,729
1,624 41,689 18,632
23,642
280 9,127 914
18,087
1,344 32,562 17,718
76.50
480.00 356.77 1,938.51
Profit/loss before tax

Income tax
17,048
5,372
15,149
2,541
1,899
2,831
12.54
111.41
Profit for the year
11,676
12,608
(932)
(7.39)
Interest income
In FY09 interest income posted 110,454 thousand, which is 28.42% up on 2008, and in absolute terms represents an increase of 24,445 thousand. The interest income headings are shown below. The interests and similar income obtained during FY 2009 totalled 209,982 thousand, with the following breakdown:
28
2009 ANNUAL REPORT
2009
Loans and advances to customers Loans and advances to credit institutions Debt securities Adjustment of income due to hedges Other income 191,072 698 17,195 (631) 1,648
2008
212,675 3,563 13,170 (547) 2,444
Total interest and similar income
209,982
231,305
Interest and similar charges during 2009 totalled 99,528 thousand, with the following breakdown:
2009
Bank of Spain and deposits from financial institutions Deposits from other creditors Debt certificates including bonds Subordinated liabilities Adjustment of costs due to hedges Other interest 15,408 80,239 5,875 (2,001) 7
2008
36,800 93,190 275 11,066 3,965
Total interest and similar charges
99,528
145,296
Evolution of interest income

120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2006 2007 2008 2009
110,454
86,009 75,259 63,789
29
Gross income
Gross income in FY09 amounted to 146,328 thousand, with an increase of 18,706 thousand, i.e. 14.66% in relative terms, compared to the results for 2008. Equity instruments at the 2009 year-end fell by 4,993 thousand. In FY09, net commissions received, minus charged commissions, totalled 20,445 thousand, which represents 5,798 thousand less than the net commissions in FY08. Financial transactions at the 2009 year-end posted 10,153 thousand. Operating income, which totalled 4,082 thousand, experienced a significant drop compared to the previous year, of 1,704 thousand. Operating charges due to investment in the Deposit Guarantee Fund for Banking Institutions totalled 992 thousand.
30
2009 ANNUAL REPORT
Evolution of gross income

160,000
146,328
140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2006 2007 2008 2009
120,692 102,938
127,622
Margin before provisions

In FY09, the margin before provisions, calculated by deducting personnel costs, general administration costs and depreciations from the gross margin, was 41,729 thousand, which is 76.50% up on 2008 and in absolute terms represents annual growth of 18,087 thousand. Personnel costs and general administration costs totalled 90,785 thousand in FY09, down 1,518 thousand, due to the cost contention plan in order to adapt to the current economic situation. In accordance with the labour collective bargaining agreement in force, banks have undertaken to pay employees supplementary amounts to the pension schemes that they pay to Social Security for retirement, widowhood or orphanage for all employees that have served the company since before 8 March 1980. The Bank has all of its actuarial obligations for workers, retired people and people who have taken early retirement covered under several contracts underwritten with five insurance companies.
31
Evolution of personnel costs and general administration costs

100,000
92,303 90,785 80,680

59,885 59,784
80,000
52,704
66,182
60,000 43,061
40,000 32,418
20,000
27,976 23,121
31,001
0 2006 2007 2008 2009
Personnell
General costs
Depreciations in FY 2009 amounted to 13,814 thousand, an 18.30% increase compared to the previous year.
Profit for the year

After deducting the charges to provisions (net) and impairment losses on financial assets (net) headings from the margin before provisions result and adding other gains and losses, the profit before tax totals 17,048 thousand at the 2008 yearend, representing a 12.54% increase on the previous year, which in absolute terms is equivalent to an increase of 1,899 thousand in this heading. After deducting taxes, which stand at 5,372 thousand, the result for the year is 11,676 thousand, which is 932 thousand less than the previous year, or 7.39% in relative terms.
COMPREHENSIVE RISK MANAGEMENT

Banco Gallego has risk control systems that cover all of its activities, mainly focussed on the commercial banking business. The Banks risk control policy, methods and procedures are approved by the Board of Directors and implemented by the subdepartments involved in their management, in particular the Risk Division and Audit Department, under the supervision of specific committees, which the Board of Directors delegates, such as the Executive Committee and the Assets and Liabilities Committee. The risk control systems also include advice and the implementation of areas for improvement which the Global Risk Committee proposes, and supervision from the Banks internal audit area, which ultimately oversees compliance with the Banks risk control policies, methods and procedures.
32
2009 ANNUAL REPORT
Credit risk
Credit risk refers to potential losses due to the breach of contractual obligations by a customer or a counterpart, as well as credit impairment losses. This risk is inherent in banks traditional banking products (mainly financial loans, credits and guarantees awarded) as well as in other types of financial assets (mainly debenture stock and derivatives portfolio). In the case of financing in the form of credits, loans and deposits granted to third parties there is a credit risk due to the non-recovery of the principal, interest and other items, in accordance with the contract terms and conditions. In the case of financial guarantees, the risk is due to the counterparts breach of its obligations with third parties, which the bank will have to assume. In order to improve risk management, Banco Gallego has developed new risk management models. Within the Basel framework, different sectorial scorecards are used, integrating the proposed digital procedure with the penalty system. Banco Gallegos Board of Directors approves credit risk control policies, methods and procedures. The Risk Management Department and the Internal Audit Department have the job of ensuring proper compliance with those directives, making sure that they are implemented effectively, and checking them on a regular basis. The Bank applies policies and procedures that limit credit risk concentration in counterparts considered individually, as well as groups of companies. Risk concentration limits are established, considering factors such as the counterparts specialist activities, geographical location and other shared financial characteristics. A sensitivity analysis is conducted to estimate the effects of possible changes in default rates for the different risk concentration groups. In response to market trends, Banco Gallego pays special attention to arrears, which grew during 2009 due to the economic situation, although at a lesser rate than the sector as a whole. This has led the Bank to implement various measures and changes in the company in order to provide the default risk control departments with more resources and ultimately streamline default payment recovery. This allows the recovery procedure in all of the areas involved to be fostered and coordinated, especially the Prelitigation, Recovery and Legal Advice Departments, and by extension the entire sales network.
33
Interest rate risk

Interest rate risk is defined as possible negative fluctuations in the economic value of the balance sheet or financial margin due to variations in market interest rates. The control unit is responsible for putting into practice procedures that ensure that Banco Gallego permanently fulfils the interest rate risk control and management policies that the Assets and Liabilities Committee (COAP in Spanish) establishes. By implementing these policies, the Bank aims to reduce interest rate risks as far as possible, striking a balance with the Banks returns. The analysis, survey and control policies to prevent the interest rate risk that the Bank assumes make use of sensitivity and scenario analysis techniques, and establish the appropriate limits to avoid exposure to excessive risk levels that could significantly affect it. These analysis procedures and techniques are revised as often as necessary to ensure that they work properly. Banco Gallego uses coverage transactions to individually manage the interest rate risk for all of the relevant financial instruments that may expose it to equally relevant interest rate risks. This virtually eliminates this type of risk.
Other market risks

Banco Gallego does not keep foreign currency for speculative purposes. Likewise, the Bank does not keep non-speculative open positions (without coverage) of relevant amounts of foreign currency.
Operational risk management

Basel II defines operational risk as possible losses due to unsuitable or flawed internal processes, personnel and systems or due to outside events. This risk has acquired a specific significance since it was categorised, and Banco Gallego is aware of it, which is why it devotes resources and effort to identify, manage and mitigate the effects of this risk. In this sense, self-appraisal systems, risk maps and procedural flows have been implemented to measure the frequency and impact of this type of risk and improve control and coverage in more exposed areas.
34
2009 ANNUAL REPORT
SIGNIFICANT EVENTS FOR THE BANK AFTER THE YEAR END

After the 2009 year-end and until the present report was drafted, no relevant events have occurred that may influence the Banks future evolution.
RESEARCH AND DEVELOPMENT ACTIVITIES

During FY2009, a series of projects were developed to improve the computing platform. Meanwhile, paper-based operational processes were replaced by electronic systems in order to make the service more efficient and streamlined.
TREASURY SHARES
As at 31 December 2009, Banco Gallego, S.A. owned 66,119 treasury shares, with a 6.01 nominal value each, representing 0.33% of the Banks share capital.
35
Evolution of the world economy

Most important highlights for 2009 and prospects for 2010
GLOBAL CLIMATE
The year 2009 will go down in history as the year when the world economic decline hit levels not seen since the Great Depression, with simultaneous recession in most of the economies around the world. Although the latest results for 4Q09 have not yet been confirmed, it is foreseeable that the world economy will record a 1.0% shrinking of the GDP versus 2008, with developed economies falling by around 3% and emerging economies growing by just 2%. In spite of the overwhelming decline, fears that the global recession will last have been dispelled over recent months, because the measures to stimulate the economy that governments and central banks have adapted have allowed activity to stabilise in the worlds leading economies. Whereas in FY09 the monetary and fiscal stimulus packages were the key to stopping the free fall of activity, in 2010 domestic demand will be the pillar for economic growth. The revival of credit channels and the recovery of the labour market are extremely important to sustain the recovery of activity. The flatness of economic growth caused a significant easing of inflation, which even brought about year-on-year falls in price indexes in developed economies for a large part of 2009. Most of the fall in inflation is explained by the drop in raw material prices compared to the average prices in FY08 and even, although to a lesser extent, by the weakness of domestic demand. In any event, during the last few months of the year inflation started to pick up, prompted by the increase in raw material prices.
38
EVOLUTION OF THE WORLD ECONOMY
2009 ANNUAL REPORT
SPANISH ECONOMY
Even though the results for the final quarter are not yet known, at the end of 2009 the Spanish economy recorded the most dramatic slump in the countrys recent history. Although the fact that the GDP recorded a 3.5% fall is no different to the rest of the Europe, the extent of the fall in domestic demand is, accounting for around 6.5 percentage points of the economy overall. The adjustment process in the property market together with the heavy slump in the labour market and persistent credit restrictions explain the high levels of falls in household consumption and in the main investment headings (both in residential construction and capital goods). The offsetting of private investment ratios justifies the main part of the adjustment in the current account deficit: the results in September showed that the Spanish economys borrowing needs totalled 61,300 million, approximately 5.8% of the GDP , compared to around 10% in mid-2008. This curb is in keeping with a fall in the aggregate investment rate of almost 5 points of the GDP , as far as 25.4%. The public sector attempted to cushion the collapse in private investment with investment and consumption stimulus plans, and although it avoided a more serious recession, the measures adopted were not enough to lay the foundations for a sustained and independent economic recovery. Public funds used to revive growth and guarantee stability for the financial system together with the impact that automatic stabilisers and the recession itself have had on the development of non-financial expenses and income have reversed the public finance surplus that existed at the start of the crisis. The forecasts for 2009 hint at deficit levels of around 11% of the GDP , whereas in 2007 the surplus was 2%. The decline in public accounts explains the stabilisation of the aggregate saving in the economy at below 20% of the GDP , against a background of a strong recovery in corporate savings and, especially, household savings (with a rate of around 18.8% of gross disposable income, the highest since the standardised series was available and almost 7 points higher than recorded a year ago). The government deficit in November 2009 surpassed 6.5% of the GDP . With a look to the immediate future, when the main European economies have left the recession behind, the Spanish economy is still recording quarterly correction rates which hint at a slower and more gradual recovery than the Eurozone average. The elimination of the imbalances acquired in the last expansive cycle, such as the surpluses accumulated in the property market, the high level of household debt and the loss of the price competitiveness of Spanish products abroad, will establish the path to emerge from the crisis. 2010 is expected to end with another fall in the GDP , around 0.6%, caused by weak private consumption and the still-high levels of correction in construction investment.
39
FINANCIAL MARKETS
The monetary policy has been a key factor in financial market trends throughout 2009. The aggressive cuts in the intervention rates of main central banks around the world (European Central Bank, Federal Reserve and Bank of England) to 0%-1% in most developed economies, along with the implementation of unconventional monetary policy management programs have resulted in interest rate curves with high peakedness, historical in some cases, between the shorter-term periods (2 years) and the medium/long-term periods of the interest rate curve (10 years). In the field of risk assets, gains were almost generalised in FY09. In corporate fixed income, the easing in spreads affected every risk level, with the fall of spreads being particularly significant in the high yield segments. Once again the activism of central banks and governments in managing the crisis has been an important factor in this credit market trend. The central banks quantitative programs (programs to buy assets on the secondary market) and the guarantees that governments have provided for issuances in the financial sector have allowed financial markets to gradually open up after being almost closed following the Lehman Brothers bankruptcy in September 2008. An upturn in risk appetite has also filtered into stock markets, which ended 2009 with revaluations of over 20% in developed economies and mean gains of over 50% in emerging countries. This is a relatively positive starting point in terms of valuation and, especially, balance sheet growth for central banks (unconventional monetary policy) along with a series of fiscal stimulus packages that have provided some support for economic activity and corporate profit which were practically free falling during the first few months of 2009. The foreign currency market has again recorded a high level of volatility, shown in the evolution of the dollar in relation to the euro, which ended the year around 1.45 USD/ EUR (similar to the start of 2009), but with a value ranging from 1.30 USD/EUR to 1.51 USD/EUR The year can be divided into two clearly-differentiated stages: a first stage in which the market punished currencies in countries whose central banks were more aggressive in adopting monetary stimulus measures (due to the inflationary and credit risks that this involved), with the pound and the dollar being the worst affected, and a second stage in which the sustainability of public accounts and their impact on growth played an important role. In this regard, the main currency affected was the euro, which fell 4% against the dollar in December alone. The low interest rates in developed economies were a catalyst for carry trade strategies, which targeted emerging currencies this time, as a result of reference rates that have stayed at higher levels and macroeconomic forecasts of quick recovery in their respective economies, which caused a general revaluation in financial assets, and also in currencies. Latin America is the best example: the Brazilian real and Chilean peso appreciated against the dollar by more than 20% in FY09.
40
2009 ANNUAL REPORT
By 2010 a transition is expected from financial markets based on expansive monetary policies towards a climate in which basic variables related to the economic cycle and corporate profits will gain importance. In this transaction an upturn in volatility and a reduced correlation between financial asset prices are expected. As far as the monetary policy is concerned, no increases in intervention rates are expected in 2010, but a gradual withdrawal of the various monetary policy programs is expected. This could considerably push up pressure on the short-term yield curve (up to 2 years), whereas the medium- and long-terms of the interest rate curve could experience further IRR rises caused by a possible revaluation in the sovereign risk. On the corporate fixed income and equity markets, the basic variables that must take over from the monetary policy might not be enough to justify the valuations that some market areas have reached (high yield credit, small-cap equity). Adjustments to the current valuation levels are therefore likely to be made. Finally, in the foreign currency market, the possibility that the dollar will continue to appreciate is not ruled out in light of the difficulties that some EMU countries might face when it comes to correcting their high public deficit levels. The factor that could counteract this trend is the development of the FEDs monetary policy. A potential extension of its support measures to the financial system through buying assets could prompt another reduction in long-term interest rates in the US and offset the appreciation of the US dollar towards the end of 2009.
41
Annual accounts
Balance sheets as at 31 December 2009 and 2008 (Notes 1 to 3)

ASSETS
Cash and balances with central banks (Note 5) Trading portfolio Equity instruments (Note 8) Trading derivatives (Note 10) Other financial assets at fair value through profit and loss Debt securities (Note 7) Available-for-sale financial assets Debt securities (Note 7) Equity instruments (Note 8) Loans and receivables Loans and advances to other credit institutions (Note 6) Loans and advances to other debtors (Note 9) Held-to-maturity investments Debt securities (Note 7) Hedging derivatives (Note 10) Non-current assets held for sale (Note 11) Tangible assets Shares (Note 12) Associates Group companies Tangible assets (Note 13) For own use Intangible assets (Note 14) Goodwill Other intangible assets Tax assets (Note 24) Current Deferred Other assets (Note 15) Other
2009
70,506 2,914 107 2,807 1,565 1,565 201,919 164,194 37,725 3,444,665 61,875 3,382,790 302,538 302,538 22,869 1,838 1,838 24,523 13,900 10,623 67,147 67,147 16,339 2,359 13,980 39,073 896 38,177 27,739 27,739
2008 (*)
65,659 1,825 1,825 9,677 9,677 440,300 411,820 28,480 3,581,186 200,920 3,380,266 30,503 523 523 28,185 6,024 22,161 39,505 39,505 16,657 2,359 14,298 46,943 3,497 43,446 5,359 5,359
Total assets
Memorandum Contingent risks Financial guarantees (Note 25) Technical guarantees Assets pledged for third-party obligations Other contingent risks Contingent commitments Drawable by third parties (Note 25) Other commitments
4,223,635
4,266,322
245,692 49,242 189,078 10 7,362 350,754 318,458 32,296
257,185 53,481 199,098 10 4,596 387,257 349,708 37,549
(*) Presented solely and exclusively for comparison purposes. Notes 1 to 46 described in the Annual Report and Appendices I and II attached hereto are an integral part of the balance sheet as at 31 December 2009.
44
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
Balance sheets as at 31 December 2009 and 2008 (Notes 1 to 3)

NET LIABILITIES AND EQUITY

LIABILITIES Trading portfolio Trading derivatives (Note 10) Financial liabilities at amortised cost Deposits from central banks (Note 17) Deposits from financial institutions (Note 17) Deposits from other creditors (Note 18) Subordinate liabilities (Note 19) Other financial liabilities (Note 21) Hedging derivatives (Note 10) Provisions (Note 20) Pension funds and similar obligations. Provisions for contingent risks and commitments Tax liabilities (Note 24) Current Deferred Other liabilities Rest (Note 16)
2009
2008 (*)
1,888 1,888 3,948,203 406,033 365,546 2,941,711 201,431 33,482 18,412 7,306 1,883 5,423 1,583 1,583 7,156 7,156
2,683 2,683 4,014,453 264,593 725,537 2,806,215 178,556 39,552 26,746 3,799 3,799 1,574 1,574 6,672 6,672
Total liabilities
NET EQUITY Equity (Note 23) Share capital Paid-in capital Reserves Accumulated reserves Less: treasury shares Profit for the year Valuation adjustments (Note 22) Available-for-sale financial assets
3,984,548
4,055,927
262,530 119,042 50,806 82,148 82,148 (1,142) 11,676 (23,443) (23,443) 239,087
251,484 119,042 50,806 70,229 70,229 (1,201) 12,608 (41,089) (41,089) 210,395
Total net equity Total shareholders net equity and liabilities
239,087 4,223,635
210,395 4,266,322
(*) Presented solely and exclusively for comparison purposes. Notes 1 to 46 described in the Annual Report and Appendices I and II attached hereto are an integral part of the balance sheet as at 31 December 2009.
ANNUAL ACCOUNTS
45
Statements of income for the years ended 31 December 2009 and 2008 (Notes 1 to 3)
Income (Expenses) 2009

Interest and similar income (Note 26) Interest and similar charges (Note 27) Interest income Return on equity instruments (Note 28) Commissions received (Note 29) Commissions paid (Note 30) Gains/losses on financial assets and liabilities (net) (note 31) Trading portfolio Other financial instruments at fair value through profit and loss Financial instruments not valued at fair value through profit and loss Other Exchange rate differences (net) Other operating income (Note 32) Other operating charges (Note 35) Gross income Administration costs Personnel costs ( 33) Other general administrative costs (Note 34) Accrued Tangible assets (Note 13) Intangible assets (Note 14) Provisioning expense (net) (note 12) Impairment losses on financial assets (net) Available-for-sale financial assets (Note 7) Loans and receivables (Note 9) Shares (Note 12) Operating income Gains/losses due to write-off of assets not classified as non-current held for sale (Note 36) Gains/losses on disposal of tangible assets (Note 13) Gains/losses on disposal of equity investments (Note 12) Other items Gains/losses on non-current assets held for sale not classified as interrupted transactions (Note 13) Profit/loss before tax Income tax (Note 24) Profit for the year Profit per share Basic Diluted 0,5911 0,5911 0,9089 0,9089 (59,784) (31,001) (13,814) (5,521) (8,293) (1,624) (41,689) (8,160) (25,399) (8,130) (1,584) 18,854 293 17,940 621 (222) 17,048 (5,372) 11,676 (59,885) (32,418) (11,677) (4,792) (6,885) (280) (9,127) (780) (8,347) 14,235 914 464 450 15,149 (2,541) 12,608 209,982 (99,528) 110,454 1,815 21,943 (1,498) 10,153 1,576 1 8,576 371 4,082 (992) 146,328
2008 (*)
231,305 (145,296) 86,009 6,808 28,277 (2,034) 7,241 7,491 (638) 488 (100) 289 2,378 (1,346) 127,622
(*) Presented solely and exclusively for comparison purposes. Notes 1 to 46 described in the Annual Report and Appendices I and II attached hereto are an integral part of the statement of income for the year ending at 31 December 2009.
46
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
Statements of consolidated income and expenditure for the years ended 31 December 2009 and 2008 (Notes 1 to 3)
FY 2009
A) Profit or loss for the financial year B) Other consolidated income and expenditure Available-for-sale financial assets Valuation gains/losses Amounts transferred to the statement of income Other reclassifications Cash flow hedges Valuation gains/losses Amounts transferred to the statement of income Amounts transferred at the initial value of the hedged items Other reclassifications Net investment hedges in businesses abroad Valuation gains/losses Amounts transferred to the statement of income Other reclassifications Exchange rate differences Valuation gains/losses Amounts transferred to the statement of income Other reclassifications Non-current assets held for sale Valuation gains/losses Amounts transferred to the statement of income Other reclassifications Actuarial gains/losses in pension schemes Entities accounted for using the equity method Valuation gains/losses Amounts transferred to the statement of income Other reclassifications Other consolidated income and expenditure Income tax 11,676 17,646 25,209 24,652 557 (7,563)
FY 2008 (*)
12,608 (22,423) (32,033) (32,033) 9,610
Total consolidated income and expenditure (A + B)
29,322
(9,815)
(*) Presented solely and exclusively for comparison purposes. Notes 1 to 46 described in the Annual Report and Appendices I and II attached hereto are an integral part of the statement of consolidated income and expenditure for the year ending 31 December 2009.
ANNUAL ACCOUNTS
47
Total statement of changes in net equity for the years ended 31 December 2009 and 2008 (notes 1 to 3)
Equity Statement for the year ended 31 December 2009

Final balance as at 31 December 2008 Adjustment due to change in accounting principles Adjustment due to errors Initial balance adjusted Total consolidated income/expenditure Other changes in net equity Merger Dividend distribution/Shareholder remuneration Transfers between net equity headings Transactions with equity instruments (net)
Share capital
119,042 119,042
Reserves and share premium

121,035 121,035 11,919 3,337 8,582
Profit for the year

12,608 12,608 11,676 (12,608) (4,026) (8,582)
Treasury shares
(1,201) (1,201) 59 59
Total shareholders funds

251,484 251,484 11,676 (630) 3,337 (4,026) 59
Valuation adjustments
(41,089) (41,089) 17,646
Total net equity

210,395 210,395 29,322 (630) 3,337 (4,026) 59
Balances as at 31 December 2009
119,042
132,954
11,676
(1,142)
262,530
(23,443)
239,087
Equity Statement for the year ended 31 December 2008 (*)

Final balance as at 31 December 2007 Adjustment due to change in accounting principles Adjustment due to errors Initial balance adjusted Total consolidated income/expenditure Other changes in net equity Capital increases/reductions (Note 23) Dividend distribution/Shareholder remuneration Transfers between net equity headings Other Transactions with equity instruments (net)
Share capital
83,440 83,440 35,602 35,602
Reserves and share premium

76,420 76,420 44,615 35,484 9,646 (515)
Profit for the year

13,672 13,672 12,608 (13,672) (4,026) (9,646)
Treasury shares
(533) (533) (668) (668)
Total shareholders funds

172,999 172,999 12,608 65,877 71,086 (4,026) (515) (668)
Valuation adjustments
(18,666) (18,666) (22,423)
Total net equity

154,333 154,333 (9,815) 65,877 71,086 (4,026) (515) (668)
119,042
121,035
12,608
(1,201)
251,484
(41,089)
210,395
(*) Presented solely and exclusively for comparison purposes. Notes 1 to 46 described in the Annual Report and Appendices I and II attached hereto are an integral part of the statement of changes in net equity for the year ending 31 December 2009.
48
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
Cash flow statements for the years ended 31 December 2009 and 2008 (Notes 1 to 3)
FY09
A) Cash flows from operating activities 1. Profit for the year 2. Adjustments to calculate cash flows from operating activities: (+) Amortisation (Notes 13 and 14) (+/) Other revisions 3. Net increases/decreases on operating assets: (+/-) Trading portfolio (Notes 8 and 10) (+/-) Other financial assets at fair value through profit and loss (Note 7) (+/-) Available-for-sale financial assets (Notes 7 and 8) (+/-) Loans and receivables (Notes 9 and 6) (+/) Other operating assets 4. Net increases/decreases on operating liabilities: (+/-) Trading portfolio (Notes 8 and 10) (+/-) Financial liabilities at amortised cost (Notes 17, 18, 19 and 21) (+/) Other operating liabilities B) Cash flows from investing activities 1. Payments: (-) Tangible assets (Note 13) (-) Intangible assets (Note 14) (-) Shares (Note 12) (-) Held-to-maturity investments (Note 7) 2. Collections: (+) Tangible assets (Note 13) (+) Shares (Note 12) C) Cash flows from financing activities 1. Payments: (-) Dividends (Note 3) (-) Other payments related to financing activities (Note 19) 2. Collections: (+) Capital issue (Note 23) (+) Subordinate liabilities issue (Note 19) D) Net increase (reduction) of cash and equivalents (A + B + C) E) Cash and equivalents at start of period (Note 5) F) Cash and equivalents at end of period (d + e) (Note 5) 50,000 4,847 65,659 70,506 (4,026) (17,297) 356 9,430 28,677 (32,249) (7,975) (4,508) (302,538) (795) (61,794) (12,219) (337,484) (1,089) 8,113 230,221 111,122 (8,191) 13,814 22,796 313,654 11,676
FY 2008 (*)
(29,718) 12,608
11,677 11,483
590 10,637 (86,071) (233,111) (23,320)
1,324 283,489 (19,024) (20,275)
(8,909) (8,778) (3,000)
412 65,690
(5,396)
71,086 15,697 49,962 65,659
(*) Presented solely and exclusively for comparison purposes. Notes 1 to 46 described in the Annual Report and Appendices I and II attached hereto are an integral part of the cash flow statement for the year ending 31 December 2009.
ANNUAL ACCOUNTS
49
BANCO GALLEGO, S.A. Annual report for the year ended 31 December 2009 1. Introduction, basis for presentation of the annual accounts and other information
1.1. Introduction Banco Gallego, S.A. (hereinafter the Bank), is a private financial institution subject to the legislation and regulations governing banks operating in Spain. The Bank was set up as a limited liability company in Spain, for an indefinite period, on 13 May 1991. Its activities began on 16 December 1991, under the corporate name Banco 21, S.A. and this changed to the current name by means of an agreement at the Special General Shareholders Meeting held on 24 October 1998, following the merger undertaken in this year, which is mentioned further on. Its main activity is the undertaking of all types of banking transactions. As at 31 December 2009, the Bank had 203 offices (204 as at 31 December 2008), of which 135 are located in Galicia, 31 in the Madrid Region, 5 in the Basque Country, 6 in Castile-Len, 5 in the Valencia Region, 3 in Asturias, 2 in Aragn, 1 in Navarre, 4 in Andaluca, 1 in the Balearic Islands, 1 in La Rioja, 1 in Cantabria, 3 in Castile-La Mancha, 1 in the Murcia Region and 4 in Catalonia. The Bank also owns different shares in companies (dependent and associate) that undertake industrial and commercial activities. The Banks registration number is 46 in Bank of Spains Special Register. The articles of association and other public information on the Bank can be found both on the Banks official website (www.bancogallego. es) and at their registered offices. Banco Gallego, S.A. and Banco 21, S.A. merged in 1998 when Banco 21, S.A. took over Banco Gallego, S.A, acquiring en masse the corporate net worth of the acquiree (which closed down) and the subsequent universal succession of its rights and obligations by the acquiring entity. The public merger deeds were granted on 2 December 1998 and were entered in the Companies Register on 9 December 1998. In this year, and once the merger between the two entities had been concluded, the share capital was increased by 90,132 thousand, which was wholly subscribed by Caja de Ahorros Municipal de Vigo-Caixavigo (currently called Caixa de Ahorros de Vigo, Ourense e Pontevedra-Caixanova), meaning that at the end of 2009 and 2008 the Bank formed part of the Caixanova Group (see Note 23). The Banks registered address is at Calle Hrreo, 38, Santiago de Compostela. Banco Gallegos General Shareholders Meeting held on 11 April 2008 adopted the resolution to delegate the Banks Board of Directors the power to increase the share capital on one or several occasions and within a maximum of 5 years from when the resolution is adopted, up to a limit of 41,720 thousand.
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At the meeting on 24 November 2008, in accordance with article 153.1b) of the Spanish Companies Law and the authorisation granted at the Banks General Shareholders Meeting, held on 11 April 2008, the Banks Board of Directors adopted the resolution to increase the share capital by 35,602 thousand (5,923,880 shares with a nominal value of 6.01 per share) and with a share premium of 5.99 per share, with a total amount of the increase of 71,086 thousand. 1.2. Basis for presentation of the financial statement The Banks Directors drew up the Banks financial statement for FY08 at the Board of Directors Meeting held on 10 March 2009, in accordance with Bank of Spain Circular 4/2004, 22 December, amended by Bank of Spain Circular 6/2008, 26 November, such that it gives a true and fair view of the Banks net equity and financial position as at 31 December 2008 and of the results of its transactions, changes in its net equity and cash flows generated during the year ended on said date. The main accounting principles and policies and valuation criteria stated in Note 2 are applied in the preparation of the financial statement, which was approved at the General Shareholders Meeting held on 19 May 2009. The Banks Directors drew up the Banks financial statement for FY09 at the Board of Directors Meeting held on 4 February 2010, in accordance with Bank of Spain Circular 4/2004, amended by Circular 6/2008, 26 November, such that it gives a true and fair view of the Banks net equity and financial position as at 31 December 2009 and of the results of its transactions, changes in its net equity and cash flows generated during the year ended on said date. The financial statement has been drawn up based on the Banks accounting records. This financial statement will be submitted for approval at the Banks General Shareholders Meeting. It is thought that it will be approved without any changes being made. In accordance with legislation in force, the Banks Directors have also drawn up Banco Gallegos consolidated financial statement for the year ended 31 December 2009, which covers all of the Groups companies by applying the techniques of integration as applicable, in accordance with article 42 of the Code of Commerce. As concluded from the contents of said consolidated financial statements, which were prepared in accordance with the European Unions International Financial Reporting Standards, Grupo Banco Gallegos assets and consolidated net equity totalled 4,254,899 thousand and 238,184 thousand, respectively, at the end of FY09 (4,382,698 and 258,710 thousand euros respectively at the end of 2008), and the consolidated net profit for FY09 attributed to the holding company totalled 7,420 thousand (9,227 thousand in FY08).
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51
1.3. Estimates made In the Banks 2009 and 2008 financial statements, estimates that the Banks Senior Management made, which the Directors subsequently ratified, have been used occasionally to assess some of the assets, liabilities, income, expenses and commitments that are posted in it. These estimates mainly refer to: Impairment losses on certain assets. The assumptions used in the actuarial calculations of liabilities and commitments for post employment compensation and other long-term commitments made with employees. The useful life of tangible and intangible assets. The fair value of certain unlisted assets. Despite the fact that the aforementioned estimates were made according to the best information available on the events analysed as at 31 December 2009 and 2008, events that may take place in the future could require these estimates to be modified significantly (up or down) in future years. If this were the case, it would be done in accordance with Bank of Spain Circular 4/2004, 22 December (acknowledging changes to the statement of income for the years in question). 1.4. Agency contracts Neither at the end of FY09 and FY08, nor at any point in those years, did the Bank enter into agency contracts, as considered in article 22 of Royal Decree 1245/1995, 14 July. Equity investments in financial institutions capital At the end of FY09 and FY08, the Bank did not have equity investments in financial institutions capital exceeding 5% of the capital or of the voting power of these institutions. 1.5. Environmental impact In view of the fact that the business activity that the Bank generally carries out does not have a significant impact on the environment, there is no breakdown of information relating to this issue. 1.6. Compliance with legislation 1.6.1. Equity Bank of Spain Circular 3/2008, 22 May, on determining and controlling minimum equity, regulates the minimum equity that Spanish financial institutions must maintain both individually and as a consolidated group and how this equity must be determined, as well as the various equity self-assessment processes that the institutions must perform and public information that they must give to the market. This Circular is the latest development, for financial institutions, of legislation on equity and supervision on a consolidated basis of financial institutions, passed under
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Law 36/2007, 16 November, which amends Law 13/1985, 25 May, on investment coefficient, equity and reporting obligations for financial brokers and other financial system standards, and also includes Royal Decree 216/2008, 15 February, on equity for financial institutions. This regulation also completes the process of adapting Spanish legislation to European Parliament and Council Directive 2006/48/EC, 14 June 2006 and European Parliament and Council Directive 2006/49/EC, 14 June 2006. In accordance with the Basel Committee on Banking Supervision Agreement (Basel II), both directives thoroughly revised the minimum equity requirements for financial institutions and their consolidated groups. Bank of Spain Circular 3/2008, 22 May, lays down which items should be calculated as equity, in order to comply with the minimum requirements established in said regulation. Equity in accordance with this regulation is classified as basic equity and tier II equity, and it is different to equity calculated in accordance with the IFRS-EU because certain headings are considered as such and they include the obligation of deducting others that are not included in the aforementioned IFRS-EU. The techniques of consolidation and valuation for controlled companies to be applied in order to calculate the Banks minimum equity requirements are different from those applied to draw up the consolidated financial statement, which also causes differences for the purposes of calculating equity under each of the regulations. The Bank has established the following management guidelines to be applied to its equity: Ensure compliance with applicable regulations regarding minimum equity requirements. Increase efficiency in equity management. Equity is considered a critical aspect of the Banks investment decision-making. The Groups capital is therefore managed on two levels: regulatory and economic. Regulatory capital management is based on an analysis of the capital base and the solvency ratios (core capital, TIER 1, etc.) under the Basel criterion (BIS) and the Bank of Spains criterion. The aim is for the capital structure to be as efficient as possible in terms of cost and compliance with regulator, rating agency and investor requirements. Active capital management includes securitisations, sale of assets, capital issues and hybrid instruments (preference and subordinate). Capital management from an economic point of view aims to create more value for the Bank and its business units. Therefore, every quarter the economic capital, RORAC and value creation results for each business unit are analysed and reported to the Management Committee. To be able to manage the Banks capital properly, future needs must be estimated and analysed, in anticipation of different cycle stages. Regulatory and economic capital forecasts are based on budget information (balance sheet, statement of income, etc) and macroeconomic scenarios that the Research Department defines. In accordance with these estimates, management measures are planned (issues, securitisations, etc.) requited to meet capital targets.
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53
Different stress scenarios are also simulated to assess capital availability in adverse situations. These scenarios are established based on sudden changes in macroeconomic variables, GDP , interest rates, stock market trends, etc. that reflect past economic recessions that could happen again in the future. The minimum equity requirements that the aforementioned Circular lays down are calculated in accordance with the Groups exposure to credit and dilution risk (in accordance with the assets, commitments and other memo accounts that these risks present, depending on their amounts, type, counterparts, guarantees, etc.), to the counterpart and position and settlement risk relating to the trading portfolio, exchange rate risk and operational risk. The Group must also comply with the risk concentration limits established in the aforementioned Circular and it must fulfil internal Corporate Governance, capital self-assessment and interest rate risk calculation obligations, as well as public reporting obligations with regard to the market, which are also established in the aforementioned Circular. To guarantee compliance with these objectives, the Group performs comprehensive management of these risks, in accordance with the aforementioned policies. The following is a breakdown, classified as basic equity and tier II equity, of the Banks equity as at 31 December 2009 and 2008, calculated in accordance with Bank of Spain Circular 3/2008, 22 May:
Thousands of euros
2009
Basic equity (Tier 1) Eligible equity Reserves Valuation adjustments eligible as basic equity Other basic equity Other basic equity deductions Tier II equity Main Tier II equity Additional Tier II equity 265,633 168,707 84,708 (23,443) 52,000 (16,339) 169,585 57,735 111,850
2008
238,142 168,647 75,241 (41,089) 52,000 (16,657) 155,955 86,905 69,050
Total eligible equity

Main ratios Tier I Tier II Solvency ratio
435,218
8.21% 5.25% 13.46%
394,097
7.12% 4.67% 11.79%
As at 31 December 2009 and 2008, and during those years, the Banks eligible equity met the requirements in accordance with current legislation at that time.
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1.6.2. Minimum Reserves Ratio Monetary Circular 1/1998, 29 September, effective as of 1 January 1999, revoked the ten-day Bank ratio, replacing it with the minimum equity ratio, which is regulated by Central European Bank Regulation 1745/2003. As at 31 December 2009 and 2008, the Bank met the minimum requirements established by applicable Spanish legislation. 1.7. Deposit Guarantee Fund The Bank is part of the Deposit Guarantee Fund. The expense incurred in the contributions made to this organisation by the Bank amounted to approximately 992 thousand in FY08 (1,346 thousand in FY08), which is posted in Other operating charges in the attached statement of income (see Note 35). 1.8. Merger of Gest 21, S.L., Sociedad Unipersonal and Galeban Energa, S.A., Sociedad Unipersonal On 10 March 2009, the Banks Directors signed the merger consisting of the dissolution and takeover of the companies Gest 21, S.L., Sociedad Unipersonal and Galeban Energa, S.A., Sociedad Unipersonal, with the en masse transfer of all of their assets to the company Banco Gallego, S.A. On 19 May 2009, the shareholders approved the merger and the merger balance dated 31 December 2008. The accounting effects of the merger were established on 1 January 2009. The aforementioned agreement was entered into the Companies Registers of Santiago de Compostela and Madrid on 5 November 2009. The merger balances were taken from the balance sheets of the merged companies as at 31 December 2008, which were approved at the respective General Shareholders Meetings and did not include any adjustments or changes. The merged companies contributed reserves totalling 3,337 thousand, which are recorded under Net equity - Shareholders funds - Reserves on the attached balance sheet. This corporate transaction took place under the Special regime for mergers, spinoffs, asset contributions and exchange of securities in Heading VIII, Heading VII, of Royal Legislative Decree 4/2004, 5 March, which approves the Revised Text of the Spanish Companies Law. In accordance with the provisions, the Ministry of Finance was officially notified before the aforementioned merger deed was entered in the Companies Register. The representatives of the companies workers who were involved in the merger were informed, in due time and form, of the points established in article 44 of Royal Legislative Decree 1/1995, 24 March, which approves the Revised Text of the Workers Statute Law. Note 45 contains the merged companies last closed balance and the list of assets transferred to the Bank subject to amortisation, showing the year in which the merged companies bought them, the values at which these assets were included in the Bank and the cost and accrued amortisation at which they were recorded in the merged companies. Due to the differences between the value of the assets and liabilities in relation to the book cost at which they were recorded in the merged companies, a merger reserve of 3,337 thousand became apparent, which is recorded.
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55
2. Accounting principles and policies and valuation criteria applied

The following accounting principles and policies and valuation criteria were applied to draw up this financial statement: 2.1. Equity investments 2.1.1. Group companies Group companies are considered to be those companies in which the Bank is able to exercise control. This power that is generally proven, although not uniquely, through the direct or indirect ownership of at least 50% of the voting rights of the controlled company or less than that or zero % if, for example, there are other circumstances or agreements that determine the existence of a decision-making unit. Note 12 se provides some information about the most significant shareholdings in this type of company. Shareholdings in group companies are posted at their acquisition cost, net of impairment losses that these shareholdings might have suffered. When, in accordance with Bank of Spain Circular 4/2004, 22 December, there is evidence of the impairment of these shareholdings, their amount is estimated as the negative difference between their recoverable value (shareholding fair value minus the necessary costs for their sale, or their value in use, which is defined as the current value of cash flows that are expected to be received from the shareholding in the form of dividends and those relating to their transfer or disposal by other means, whichever is the greater of the two) and their book value. Impairment losses, and recoveries of the losses previously posted, are charged or credited to the Impairment losses on other assets (net) heading of the statement of income. Accrued dividends in the year for these shareholdings are posted in the Return on equity investments heading of the statement of income. 2.1.2. Associates They are companies over which the Bank can exercise significant control, although they are not a decision-making unit with the Bank or are they under joint control. This power is usually demonstrated by direct or indirect shares that are equal to or greater than 20% of the controlled companys voting power. Shares in associate companies are posted at their acquisition cost, net of impairments that these shares might have suffered and estimating the impairment in the same terms as the group companies shares. Accrued dividends in the year for these shareholdings are posted in the Return on equity investments heading of the statement of income. Note 12 provides some information about the most significant shareholdings in this type of company.
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2.2. Financial instruments 2.2.1. Initial recording of financial instruments Financial instruments are recorded in the balance sheet when the Bank becomes party to the contract from which they originate in accordance with the terms and conditions of the aforementioned contract. In particular, debt instruments, such as loans and deposits, are recorded from the date on which the legal right to receive or the legal obligation to pay, respectively, takes effect. Financial derivatives of a general nature are recorded on the date on which they are contracted. The sale and purchase of financial assets implemented via conventional contracts, understood to be those in which the mutual obligations of both parties should be carried out within a timeframe set out by legislation or by market conventions and which can not be settled through differences, such as trading contracts or forward foreign sales or purchases, are recorded from the date on which the rewards, risks, rights and duties attached to all owners are the responsibility of the acquirer, which, depending on the type of financial asset bought or sold, can be the contracting date or the settlement or delivery date. More specifically, operations carried out on foreign currency spot markets are recorded on the settlement date; operations carried out with capital instruments negotiated on secondary Spanish securities markets are recorded on the contracting date and operations carried out with debt instruments negotiated on secondary Spanish securities markets are recorded on the settlement date. 2.2.2. Write-off of financial instruments A financial asset is written-off the balance sheet when any of the following situations occur: The contractual rights to the cash flows they generate have expired; or The financial asset is passed on and the financial assets risks and rewards are substantially transferred, or where the substantial transfer or retention of the risks and rewards has not yet happened, control of the financial asset is transferred. Similarly, a financial liability is written-off the balance sheet when the obligations it generates have expired or when the Bank re-acquires it either with the intention of reinvesting it or cancelling it.
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57
2.2.3. Fair value and amortised cost of financial instruments The fair value of a financial instrument on a specific date is understood as the amount for which it could be bought or sold on this date between two parties, duly informed, in a mutually independent transaction. The most objective and usual reference of the fair value of a financial instrument is the price that would be paid for it on an organised, transparent and deep market (listing price or market price). When there is no market price for a particular financial instrument, its fair value is estimated using recent transactions of similar instruments and when these are not available, by valuation models that have been sufficiently checked by the international finance community; the specific characteristics of the financial instrument to be valued are taken into consideration and, in particular, the different types of risk associated with the instrument. In particular, the fair value of financial derivatives traded on organised, transparent and deep markets included in trading portfolios is added to its daily listing and if, for exceptional reasons, a listing cannot be established on a specific date, similar methods to those used for valuing derivatives not negotiated on organised markets are used. The fair value of derivatives not traded on organised markets or traded on organised markets that are not very transparent or deep is added to the total future cash flows originating from the instrument, deducted on the valuation date (real value or theoretical close); using methods acknowledged by financial markets in the valuation process: Net Present Value (NPV), models for determining the price of options, etc. Amortised cost is understood as the cost of acquiring a financial asset or liability (plus or minus, depending on the case) adjusted through principal repayments and interest and plus or minus, depending on the case, the part included in the statement of income (by the effective interest method) of the difference between the initial amount and the repayment value of the financial instrument. In the case of financial assets, the amortised cost also includes corrections to its value caused by any impairment that it may have experienced. Effective interest is the discount rate that exactly equates the initial value of a financial instrument to its estimated cash flows for all items during its remaining life. For fixed rate financial instruments, the effective interest rate matches the contractual interest rate established when the acquisition takes place and revised, when necessary, by commissions and by transaction costs that, in accordance with Bank of Spain Circular 4/2004, 22 December, should be included in the calculation of this effective interest rate. For variable rate financial instruments, effective interest is estimated in a similar way to fixed rate operations; recalculating the operations contractual interest rate on each of the revision dates and considering any changes that future cash flows may experience. The following is a summary of the different valuation techniques that the Bank uses for the valuation of financial instruments posted at fair value as at 31 December 2009 and 2008:
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Percentage Assets Market value based on

Listings published in active markets Internal valuation models with observable market data Internal valuation models with non-market data
Liabilities 2008
92% 8%
2009
93.15% 6.85%
2009
0.62% 99.38%
2008
1% 98% 1%
100%
100%
100%
100%
The main techniques used in internal valuation models are: In the valuation of financial instruments that allow static hedging (mainly forwards and swaps) the present value is used. In the valuation of financial instruments that require dynamic hedging, the BlackScholes model is mainly used. Credit risk is assessed using similar dynamic models to those used to assess the interest risk. The Banks Directors think that the financial assets and liabilities recorded in the balance sheet and the profit/loss generated by these financial instruments are reasonable and reflect their market value. The following is a breakdown of the financial instruments in accordance with the valuation method used:
2009 Listings published in active markets

Trading portfolio (asset) Debt securities and other equity instruments Hedge derivatives (asset) Trading portfolio (liability) Hedge derivatives (liability) 197 494,540 125
2008 Total
2,914 506,022 22,869 1,888 18,412
Internal models
2,717 11,482 22,869 1,763 18,412
Listings published in active markets

78 442,315 239
Internal models
1,747 7,662 30,503 2,444 26,746
Total
1,825 449,977 30,503 2,683 26,746
2.2.4. Classification and valuation of financial assets and liabilities The following tiers are used to present the financial instruments classified in the balance sheet: Financial assets and liabilities at fair value through profit and loss: this tier includes financial instruments classified as trading portfolio, as well as other financial assets and liabilities classified as fair value through profit and loss: Financial assets included in the trading portfolio are considered those acquired with the intention of investing them in the short-term or those that form part of a financial instrument portfolio that is jointly identified and managed, so that there is evidence of recent action to obtain sort-term gains, as well as derivative instruments that have not been designated as hedging instruments, including those segregated from hybrid financial instruments in accordance with Bank of Spain Circular 4/2004, 22 December.
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59
Financial liabilities included in the trading portfolio are considered those issued with the intention of re-acquiring them in the near future or which form part of a financial instrument portfolio that is jointly identified and managed, so that there is evidence of recent action to obtain short-term gains; short position arising from the sale of assets acquired temporarily with non-optional reversal agreement or securities received on loan; and derivative instruments that have not been designated as hedging instruments, including those segregated from hybrid financial instruments when applying current legislation. Financial instruments classified at fair value through profit and loss are initially accounted for at their fair value, subsequently recording changes to this value under Gains/losses on assets and liabilities in the statement of income, except for changes to the fair value as a result of accrued returns on financial instruments different to the trading derivatives, which are recorded in Interest and similar income, Interest and similar charges or Return on equity investments on the statement of income by type. Return on debt instruments included in this tier is calculated using the effective interest method. Despite the above comments, financial derivatives with equity instruments as the underlying asset, for which the fair value cannot be determined in a sufficiently objective manner and which are settled through by delivering them, are accounted for at cost. Loans and receivables: this tier includes the listed debt securities, financing loaned to third parties originating from typical credit and loan activities carried out by the Bank and debts incurred by the buyers of goods and by the users of services provided. The financial assets included in this tier are initially accounted for at fair value, adjusted by the amount of fees and transaction costs that are directly attributable to the acquisition of the financial asset and which, in accordance with Bank of Spain Circular 4/2004, 22 December, should be assigned to the consolidated statement of income via the application of the effective interest method to maturity. Subsequent to their acquisition, the assets included in this tier are accounted for at amortised cost. Assets acquired at a discount are accounted for by the cash paid and the difference between their redemption value and the cash paid is recognised as financial income in accordance with the effective interest method during the period remaining to maturity. Generally speaking, the Banks intention is to keep loans and credits granted to final maturity, which is why they are recorded in the balance sheet at amortised cost.
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Interest accrued on these securities, calculated by applying the effective interest method, is recorded in Interest and similar income on the statement of income. Exchange rate differences in the securities recorded in a currency other than Euros included in this portfolio are recorded in accordance with Note 2.4. Impairment losses are recorded in accordance with Note 2.8. Debt instruments included in fair value hedging operations are recorded in accordance with Note 2.3. Available-for-sale financial assets: this tier includes debt securities not classified as loans and receivables and equity instruments belonging to entities that do not belong to the Group, joint ventures or associates and which have not been classified as fair value through losses and gains. Instruments included in this tier are initially accounted for at fair value, revised by the amount of commissions and transaction fees that are directly attributed to the acquisition of the financial asset, which are posted in the statement of income by applying the effective interest method defined in Bank of Spain Circular 4/2004, 22 December, until they mature, except when the financial assets do not have fixed maturity, in which case the asset is posted in the statement of income when it is impaired or written-off the balance sheet. Subsequent to their acquisition, financial assets included in this tier are accounted for at fair value. Notwithstanding the foregoing, equity instruments for which the fair value cannot be determined in a sufficiently objective manner are accounted for at cost, net of possible impairments to their value and calculated in accordance with the criteria stated in Note 2.8. Changes to the fair value of financial assets classified as available-for-sale relating to their accrued interest or dividends are posted in Interest and similar income (calculated using the effective interest method) and in Return on equity investments in the statement of income, respectively. Impairment losses are accounted for in accordance with Note 2.8. Exchange rate differences in the securities recorded in a currency other than Euros included in this portfolio are recorded in accordance with Note 2.4. Changes to the fair value of financial assets included in this tier and hedged in fair value hedging operations are accounted for in accordance with Note 2.3. Other changes to the fair value of financial assets classified as available-for-sale from the moment of acquisition are accounted for in Net equity - Valuation adjustments - Available-for-sale financial assets on the balance sheet until the financial asset is written off, when it is recorded on the statement of income under Gains/ losses on financial assets and liabilities (net) - Financial instruments not accounted for at fair value through profit and loss.
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61
Held-to-maturity investments: this tier includes debt securities traded on organised markets, with fixed maturity and cash flows of a specific amount or an amount that can be determined that the Bank has held since the beginning and on any subsequent date, with the intention and the financial capacity to hold them until maturity. The debt securities in this tier are initially accounted for at fair value and revised by the amount of transaction fees directly attributed to the acquisition of the liability, which are posted in the statement of income using the effective interest method defined in Bank of Spain Circular 4/2004, 22 December. They are then valued at their amortised cost, calculated in accordance with their effective interest rate. Interest accrued on these securities, calculated by applying the effective interest method, is recorded in Interest and similar income on the statement of income. Exchange rate differences in the securities recorded in a currency other than Euros included in this portfolio are recorded in accordance with Note 2.4. Possible impairment losses are recorded in accordance with Note 2.8. Financial liabilities at amortised cost: this tier includes financial assets that have not been included in any of the previous tiers. These financial liabilities in this tier are initially accounted for at fair value and revised by the amount of transaction fees directly attributed to the issuing of the liability, which are posted in the statement of income using the effective interest method defined in Bank of Spain Circular 4/2004, 22 December, until they mature. They are then valued at amortised cost, calculated by applying the effective interest method defined in Bank of Spain Circular 4/2004, 22 December. Interest accrued on these securities, calculated by applying the effective interest method, are recorded in Interest and similar charges on the statement of income. Exchange rate differences in the securities recorded in a currency other than Euros included in this portfolio are recorded in accordance with Note 2.4. The financial liabilities in this tier covered by fair value hedging operations are recorded in accordance with Note 2.3. 2.3. Accounting hedges and mitigation of risk The Bank uses financial derivatives as part of its strategy to reduce its risk exposure, including risks associated with interest rates and foreign currency exchange. When these transactions comply with certain requirements, they are considered hedging transactions. When the Bank applies the term hedging to a transaction, it is applied from the beginning of the transaction or the instrument included in the hedge and the transaction is properly recorded. The hedged instrument or instruments are identified, as well as the hedging instrument or instruments and also the type of risk that is being hedged. In addition, the criteria or methods that the Bank follows to account for the efficiency of the hedge during its life are documented, by the risk being hedged.
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The Bank only considers hedging transactions to be those that are highly effective during their predicted time span. Hedge is considered to be highly effective when the variation produced in the fair value attributed to the risk hedged in the financial instrument or instruments hedging transaction is offset, almost entirely, by the variation in the fair value of the hedging instrument or instruments, as applicable. To measure the effectiveness of hedging transactions, the Bank analyses whether, from the beginning to the end of the period set out for the hedging transaction, it can be prospectively expected that the variation in the fair value of the hedged item attributed to the hedged risk can be almost entirely offset by fair value changes to the hedged instrument or instruments, as applicable, and that, retrospectively, the hedging results have fluctuated in a range between 80% and 125% of the hedged item result. The following tier is used to classify the Banks hedging transactions: Fair value hedges: hedge exposure to fair value variation in financial assets and liabilities or still unconsolidated firm commitments, or an identified share of the aforementioned assets, liabilities or firm commitments, which can be attributed to a particular risk and whenever they affect the statement of income. In the specific case of financial instruments designated as hedging items and accounting hedges, the valuation differences in the hedging items and in the hedged items -as far as the type of hedged risk is concerned- are recognised directly in the statement of income. The Banks stops posting hedging transactions when the hedging instrument expires or is sold, when the hedging operation no longer fulfils the requirements to be considered as such, or when the decision to consider the transaction as a hedge is revoked. When a fair value hedging transaction is interrupted, in accordance with the previous paragraph and in the case of hedged items at amortised cost, the value adjustments from applying the hedge accounting described above are assigned to the statement of income until the hedged instrument due date, applying the effective interest method, which is re-calculated when the hedging transaction is interrupted. 2.4. Foreign currency transactions 2.4.1. Functional currency The Banks functional currency is the Euro. Therefore, all amounts and transactions denominated in currencies other than the Euro are considered to be denominated in foreign currency. The breakdown of the exchange rate in thousand of euros of the main assets and liabilities on the balance sheet held in foreign currency, in accordance with the type of headings and the most significant foreign currencies in which they are denominated, is as follows:
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63
Exchange rate in thousands of euros
Type of foreign currency balances:

Balances in North American dollars Cash and deposits Loans and receivables Other Balances in Swiss francs Cash and deposits Loans and receivables Other Balances in other foreign currencies Cash and deposits Loans and receivables Other
2009 Assets
791 6,122 7,961 14,874 688 8,049 8,737 5,701 17,583 15 23,299
Liabilities
49,630 130 49,760 471 471 5,800 5,800
2008 Assets
2,037 6,150 13,347 21,534 429 7,603 959 8,991 847 20,870 7 21,724
Liabilities
47,227 165 47,392 527 527 4,071 1 4,072
Total foreign currency balances
46,910
56,031
52,249
51,991
2.4.2. Conversion criteria for foreign currency amounts: Foreign currency transactions are initially posted at the exchange rate in Euros resulting from application of the current exchange rate at the time of the transaction. Subsequently, the Bank converts the monetary amounts into foreign currency using the year-end exchange rate. In addition: 1. Non-monetary items valued at historic cost are converted at the exchange rate on the acquisition date. 2. Non-monetary items valued at fair value are converted at the exchange rate on the date on which this fair value was determined. 3. Income and expenses are converted by applying the exchange rate on the transaction date. An average exchange rate for the period can be used for all transactions carried out in the same period. 4. Forward purchases and sales of foreign currency versus foreign currency and of foreign currency versus Euros, which do not hedge net worth positions, are translated at exchange rates current at year-end on the forward foreign currency market for the relevant due date. 2.4.3. Recording of exchange rate differences: Exchange rate differences produced when translating foreign currency amounts into the functional currency are generally recorded at their net amount in Exchange rate differences (net) on the statement of income, except for the exchange rate differences produced in financial instruments classified at fair value through profit and loss, which are recorded in the statement of income without differentiating them from other variations that the fair value could suffer.
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ANNUAL ACCOUNTS
2009 ANNUAL REPORT
2.5. Recognition of income and expenses Details of the main accounting criteria that the Bank uses to post its income and expenses are as follows: 2.5.1. Income and expenses from interest, dividends and similar items: Generally speaking, income and expenses from interest and similar items are posted for accounting purposes in accordance with their accrual period by applying the effective interest method. Dividends received from other companies are recognised as income when the right to receive them comes into effect. 2.5.2. Commissions, fees and similar items: Income and expenses from commissions, fees and other similar items that should not form part of the effective interest rate calculation of transactions and/or that do not form part of the acquisition cost of financial assets and liabilities that are different to those classified as fair value through profit and loss, are recognised in the statement of income with different criteria according to their type. The main ones are: Those linked to the acquisition of financial assets and liabilities accounted for at fair rate through profit and loss, which are recognised in the statement of income when payment is made. Those originating from transactions or services carried out over time are accounted for in the statement of income during the life of said transactions or services. Those relating to the provision of a service that is carried out in one single action are assigned to the statement of income when the single action takes place. 2.5.3. Non-financial income and expenses: Recognised for accounting purposes in accordance with accrual criteria. 2.5.4. Deferred collections and payments: Recognised for accounting purposes at the amount resulting from financially updating the expected cash flows at market rates. 2.6. Offsetting balances Receivables and payables originating from transactions are only mutually offset, and consequently recorded in the balance sheet at their net amount, when they, either contractually or by law, consider the offsetting option and intend to settle the receivables and payables for their net amount or realise the asset and simultaneously pay for the liability. 2.7. Financial asset transfers The posting of financial asset transfers depends on the way in which the risks and benefits linked to the assets in question are transferred to third parties: If the risks and benefits of the transferred assets are transferred simultaneously to third parties which is the case of absolute sales, repo sales at fair value on the repo date, financial assets sales with a deep-out-of-the-money call or put option, asset securitisations in which the transferor does not withhold subordinate financing or grant any type of credit enhancement to the new holders, and other similar cases, the transferred financial asset is written off the balance sheet, simultaneously consolidating any right or obligation withheld.
ANNUAL ACCOUNTS
65
If the risks or benefits related to the transferred financial asset are significantly withheld which is the case of repo sales or financial assets for a fixed price or the selling price plus interest, security loan agreements in which the borrower undertakes to return them or similar assets, financial asset securitisations in which subordinate financing or other credit enhancements are kept which substantially absorb the credit losses expected for the securitised assets, and other similar cases, the transferred financial asset is not written off from the balance sheet and it is still valued using the same criteria applied before the transfer. On the other hand, the following are consolidated in the accounts, without offsetting each other: A related financial liability for the same amount as the consideration received, which is then valued at amortised cost, or if the aforementioned requirements are fulfilled for its classification as other financial liabilities at fair value through profit and loss, at fair value, in accordance with the aforementioned criteria for this financial liabilities tier. Both the income on the transferred financial asset but not written off and the expenses on the new financial liability. If the risks and benefits related to the transferred financial asset are neither substantially transferred nor withheld which is the case of repo sales of financial assets with a neither deep in-the-money nor deep-out-of-the-money call or put option, securitisations of financial assets in which the transferor assumes a subordinate financing or another type of credit enhancement for part of the transferred asset, and other similar cases-, a differentiation is made between: Whether the transferor does not withhold control of the transferred financial asset: in this case, the transferred asset is written off the balance sheet and any right or obligation withheld or created as a result of the transfer is consolidated. Whether the transferor does withhold control of the transferred financial asset: it continues to consolidate it in the balance sheet at the same amount as its exposure to the changes in value that it might suffer and it consolidates a financial liability related to the transferred financial asset. The net amount of the transferred asset and the related liability will be the amortised cost of the withheld rights and obligations, if the transferred asset is calculated by its amortised cost, or the fair value of the withheld rights and obligations if the transferred asset is calculated by its fair cost. In accordance with the above, financial assets are only written off the balance sheet when the cash flows that they generate have disappeared or the significant rights and benefits that they include have been substantially transferred to third parties.
66
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
2.8. Impairment losses A financial asset is considered impaired and, consequently, its carrying amount is corrected to reflect its impairment, when there is objective evidence of events giving rise to: A negative impact on future cash flows that were estimated at the time the transaction took place, in the case of loans and debt instruments. In the case of equity instruments, the book value cannot be entirely recovered. Generally speaking, the correction applied to the carrying amount of financial instruments due to impairment is made against the statement of income for the year in which the impairment arises. Recoveries of impairment losses previously recognised, if applicable, are recognised in the statement of income for the year in which the aforementioned impairment is eliminated or reduced. If the recovery of a particular amount is thought to be unlikely, said amount is eliminated from the balance sheet subject to any action that the Bank takes to collect it, until such time as the Banks rights expire, whether due to limitations, cancellation or other causes. Details of the criteria that the Bank applies to determine possible impairment losses in each of the different financial instrument tiers are as follows, as well as the method used to calculate the hedges posted for said impairment: 2.8.1. Debt instruments accounted for at amortised cost: The amount of impairment losses on these instruments matches the positive difference between the book value and the respective current values of future expected cash flows. The market value of listed debt instruments is thought to be a fair estimate of the current value of future cash flows. The following is taken into consideration when estimating future cash flows of debt instruments: All of the amounts that are expected to be received during the rest of the instruments life, even, where applicable, those that might originate in its guarantees (having deducted the necessary costs to allocate and sell them later). Impairment loss takes into consideration the option of collecting accrued, due and uncollected interest. The different types of risk to which each instrument is subject. The circumstances in which collection is likely to take place. Subsequently, these cash flows are updated using the instruments effective interest rate (if its contractual rate were fixed) or using the contractual effective interest rate on the updating date (if this is variable). In the specific case of impairment losses caused by the realisation of bad debt risk of those obliged to pay (credit risk), a debt instrument suffers impairment:
ANNUAL ACCOUNTS
67
When the ability of the party liable to pay is debased, either due to their bad credit history of for other reasons. Realisation of country risk, understood as the risk due to the combination of debtors resident in a country for circumstances different to the usual trade risk. Impaired financial assets are non-performing assets due to default, which include debt instruments with past-due amounts more than three months old and also a customers transactions when the balances of non-performing assets are more than 25% of the amounts receivable, as well as contingent risks in which the guaranteed party is in arrears. The process for assessing possible impairment losses is carried out: Individually, for all of the significant debt instruments. Collectively: the Bank sets out different transaction classifications by type of party liable to pay and the conditions of the country where they live, the transaction situation and their type of guarantee, their default history, etc. and for each of these risk groups it establishes the impairments that are specific transactions. The Bank also identifies the homogenous debt and contingent risk groups that, without fulfilling the criteria to be classified as impaired, do show weaknesses that could mean greater losses than the aforementioned tiers, due to belonging to a group that is experiencing problems. In this case, the impairment losses are calculated as the difference between the amount recorded in the asset for those instruments and the current value of the cash flows that are expected to be collected, deducted at the average contractual interest rate. The group of hedges that exist at any time is the sum of the hedges relating to losses due to specific transactions, losses due to homogenous debt groups that show weaknesses and losses due to inherent impairment (losses incurred as at the date of the financial statements, calculated using statistical procedures) and the hedge for groups of risks experiencing difficulties. Acknowledgement of interest accrual in the statement of income is interrupted for all of the debt instruments classified individually as impaired, as well as for those for which impairment losses have been calculated collectively due to having matured amounts over three-months old. 2.9. Available-for-sale debt or equity instruments The impairment of the securities included in the available-for-sale financial assets portfolio equates to the positive difference between their acquisition cost (net of any amortisation of capital) and their fair value; once any impairment loss previously recognised in the statement of income has been deducted.
68
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
In the case of impairment loss due to insolvency of the available-for-sale debt securities issuer, the procedure that the Bank follows to calculate the aforementioned losses matches the criterion explained in paragraph 2.8.1. on debt instruments accounted for at amortised cost. The Bank applies policies, methods and procedures to find out whether there is evidence of impairment due to counterpart insolvency. These policies, methods and procedures are applied at the start of the transaction and throughout its duration. They consist of a qualitative and documentary analysis of the issuer, and in the case of debt instruments of the issue as well, and of monitoring events that could have an impact on its contingent exposures and commitments. As regards hedging credit risk loss, the debt and equity instruments available for sale and classified as non-performing are generally hedged in accordance with the following criteria: i. Non-performing assets due to counterpart default: Debt and equity instruments, regardless of the owner or guarantee, with a past-due amount over three months old, are assessed individually, bearing in mind the age of the due amounts and the counterparts financial position. ii. Non-performing assets due to reasons other than counterpart default: Debt instruments that, without there being reason to classify them as non-performing due to default, do present reasonable doubt as to whether they can be recovered in the agreed terms, are analysed individually. The hedge is the difference between the amount recorded in the asset and the current value of the cash flows that are expected to be collected. These criteria and policies are applied in the same way to debt and equity instruments, whether they are listed or unlisted assets. When there is objective evidence that the negative differences arising in the valuation of these assets originate from the impairment of said assets (continued falls in value of more than 40% over a period of more than 18 months), they are no longer recorded in Net equity - Valuation adjustments - Available-for-sale financial assets on the balance sheet and the accrued amount is recorded in the statement of income. In the case of debt instruments, impairment losses that are subsequently recovered are consolidated in the statement of income for the year in which this recovery takes place In the case of equity instruments, on the other hand, any recovery of these losses is posted in Net equity - Valuation adjustments - Available-for-sale financial assets of the balance sheet. Likewise, the negative differences originating from the valuation of debt instruments classified as non-current assets held for sale, which are recorded in net equity, are considered undertaken and, consequently, are recognised in the statement of income when the assets are classified as non-current held for sale.
ANNUAL ACCOUNTS
69
2.9.1. Equity instruments accounted for at cost Impairment losses of equity instruments accounted for at cost equate to the difference between their carrying amount and the present value of expected, future cash flows, restated using the market rate of return for similar securities. Impairment losses are recorded on the consolidated statement of income for the year in which they arise, directly deducting the instrument cost. These losses can only be subsequently recovered if the assets are sold. Impairment losses on shareholdings in group and associate companies, which, for the purposes of drawing up these accounts, are not considered as Financial instruments, are estimated and posted in accordance with the criteria specified in section 1 of this Note. 2.9.2. Financial guarantees and provisions established Financial guarantees are considered contracts by which an entity is liable to pay specific amounts on behalf of a third party if this third party does not pay and regardless of the way in which this obligation is implemented: deposit, financial or technical guarantee, absolute documentary credit issued or confirmed by the entity, etc. Whatever their type, implementation or other circumstances, financial guarantees are analysed periodically to determine their credit risk exposure and to estimate the need for provisions; this is done by applying similar criteria to those set out for quantifying impairment losses experienced by debt instruments accounted for at amortised cost and explained above in Note 2.7.1. The provisions established for these transactions are recorded in Provisions - Provisions for risks and contingent commitments in the balance sheet. The allocation and recovery of these provisions is recorded in Provisioning expense (net) on the statement of income. Where the allocation of a provision for financial guarantees is necessary, the outstanding accruals on commission associated with these transactions, which are recorded in Other liabilities on the balance sheet, are reclassified according to the necessary provision. 2.10. Accounting of lease transactions 2.10.1. Financial leasing Financial leasing transactions are considered to be those where, fundamentally, all of the risks and rewards linked to the good are the responsibility of the lessor. When the Bank acts as lessor of a good in a financial leasing transaction, the sum of the current values of the amounts that it will receive from the lessee plus the guaranteed residual value, usually the lessees call option price at the end of the contract, is entered as financing loaned to third parties, and so is included in the Loans and Receivables heading on the balance sheets, in accordance with the type of lessee.
70
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
When the Bank acts as lessee in a financial leasing transaction, it enters the costs of the leased assets on the balance sheets, depending on the type of asset being leased, and also a liability with the same amount (which will be the lower between the fair value of the leased good and the sum of the current values of the amounts to be paid to the lessor, plus the call option price, where applicable). The assets are amortised following similar criteria to those applied to all of the Banks tangible assets for own use (see Note 2.14). In both cases, the financial income and expenses originated under these contracts are debited and credited, respectively, to the statement of income in the Interest and similar income and Interest and similar charges sections, respectively. To estimate their accrual, the effective interest method is used for the transactions, calculated in accordance with legislation in force. 2.10.2. Operating leases Within operating lease transactions, the ownership of the leased good and, fundamentally, all the risks and rewards linked to the good, are the responsibility of the lessor. When the Bank acts as lessor, the acquisition cost of the leased goods is recorded under Tangible assets on the balance sheet either as Investment property or Other assets leased out under operating leases, depending on the type of asset being leased. These assets are depreciated in accordance with policies set out for similar tangible assets for own use (see Note 2.14). Income resulting from leasing contracts is consolidated using the linear method in Other operating income on the statement of income. When the Bank acts as lessee, the leasing income, including incentives that the lessor has granted, are charged using the linear method to Administration costs - Other general administration costs on the statement of income. 2.11. Assets managed Third party-owned assets that the Bank managed are not included in the balance sheet. Commissions generated through this activity are included in Commissions received on the statement of income. In FY09 and 2008, the Bank did not manage any third party assets. 2.12. Personnel costs 2.12.1. Post-employment remuneration The Bank is committed to supplementing the public Social Security system benefits for certain pensioners, employees and eligible parties, subsequent to the end of their employment.
ANNUAL ACCOUNTS
71
The post-employment commitments made by the Bank to their employees are considered Defined contribution plans when the Bank makes predetermined contributions to another entity without the legal or real obligation of having to make additional contributions if the aforementioned entity is not able to pay the contributions to employees relating to services provided in current and previous years. Post-employment contributions that do not meet the requirement mentioned earlier are considered Defined benefit plans. Defined contribution plans Contributions that the Bank makes for this purpose are recorded in Administration costs - Personnel costs on the statement of income. Amounts pending contribution at each year-end, if applicable, are recorded at their current value in Provisions - Pension fund and similar obligations under liabilities on the balance sheet. On 23 July 2007, the Bank signed an insurance policy with Allianz Compaa de Seguros y Reaseguros, S.A. (unrelated company), which complies with the requirements established in Royal Decree 1588/1999, 15 October, to supplement the retirement agreements assumed with its employees covered under other insurance policies. The premiums paid for this item totalled 161 thousand euros, which are posted in Administration costs Personnel costs on the statement of income for 2009 attached hereto (see Note 33). There were no accrued premiums pending payment for defined contribution plans at 31 December 2009 or 31 December 2008. Defined benefit plans Under Provisions Pension funds and similar obligations in liabilities on the balance sheets, the Bank records the current value of post-employment defined benefit plans (net), according to the following explanation, of the fair value of assets that meet the requirements to be considered as plan assets and of unconsolidated past service cost, as applicable. The Bank records the actuarial gains and/or losses that may arise in the valuation of post-employment plans assumed with its staff in their entirety in the statement of income for the year in which they are incurred. Plan assets are those linked to specific defined benefit commitments with which these obligations will be directly paid and which bring together the following conditions: They do not belong to the Bank, they belong to a legally-separated third party that is not related to the Bank; They are only available for paying or financing post-employment compensation of employees and cannot be returned to the Bank except when there are enough assets in the plan to meet all the plans or Banks obligations relating to compensation for current or past employees or for repaying employee compensation for which the Bank has already paid.
72
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
The past service cost which originates from changes to already existing postemployment compensations or from the implementation of new benefits is recognised in the statement of income during the period between the moment in which the new commitments arise and the date on which the employee has the irrevocable right to receive new benefits. Details of post-employment compensation recognised in the statement of income are as follows: The cost of current year services (understood as the increase in the present value of obligations originating as a result of services provided in the year by employees) in Administration costs - Personnel costs. Interest cost (understood as the increase generated during the year in the present value of obligations due to the passing of time) in Interest and similar charges. Given that obligations are recorded under liabilities on the balance sheet, net of plan assets, the cost of liabilities consolidated in the statement of income is, exclusively, that which related to the obligations recorded under liabilities. The Bank has outsourced commitments resulting from staff liabilities, via insurance policies with unrelated entities (Banco Vitalicio de Espaa, C.A. de Seguros y Reaseguros and Zurich Life Espaa, Compaa de Seguros y Reaseguros, S.A.), who meet the requirements set out by Royal Decree 1588/1999 of 15 October. In FY09 and FY08 no amount was paid out for this item. In 2004, the Bank underwrote outsourced insurance policies with Axa Aurora Vida, S.A. de Seguros y Reaseguros (unrelated company) to cover post-employment commitments to current senior managers. Premiums paid for this item amounted to 775 thousand in FY08 (536 thousand in FY08), which are recorded in Administration costs - Personnel costs on the statement of income (see Note 33). The Bank has outsourced the commitments made to their current employees for the purposes of retirement, via insurance policies with Zurich Life Espaa, Compaa de Seguros y Reaseguros, S.A. (unrelated entity), which meet the requirements set out in Royal Decree 1588/1999 of 15 October. Premiums paid for this item amounted to 2,231 thousand in FY09 (1,911 thousand in FY08), which are recorded in Administration costs - Personnel costs on the statements of income for those years (see Note 33). In addition, on 28 December 2007, the Bank signed an insurance policy with Nationale-Nederlanden Vida, Ca. de Seguros y Reaseguros, S.A.E. (unrelated company) to supplement the retirement agreements assumed with Senior Management staff, which complies with the requirements under Royal Decree 1588/1999, 15 October. In FY09 and FY08 no amount was paid out for this item. A breakdown of the current value of these post-employment remuneration plans is shown below, showing the way in which they are covered and the fair value of plan assets used to cover them:
ANNUAL ACCOUNTS
73
2009
Current value of accrued commitments Insurance policies - Working staff Insurance policies - Non-working staff Less - Fair value of plan assets Balance of Provisions Pension funds and similar obligations 30,665 23,441 (54,106)
2008
28,600 23,191 (51,791)
As at 31 December 2009 and 2008, there was no unconsolidated past service cost. The present value of commitments has been determined by independent, qualified actuaries under whose responsibility the following criteria have been applied to quantify them: Calculation Method: Projected credit unit, which considers each year of service as generating an additional unit with the right to benefits, with each unit accounted for separately. Used actuarial assumptions: unbiased and mutually compatible. Generally speaking, the main actuarial assumptions used in their calculations were:
Actuarial assumptions
Technical interest rate Life tables Annual wage growth rate (*) According to applicable Spanish legislation.
FY09
(*) GRM/F-95 and PERM/F-2000/P 2%
FY08
(*) GRM/F-95 and PERM/F-2000/P 2%
The fair value of plan assets has been calculated, at year-end, as the mathematic provision amount relating to the insurance policy on said date, certified by the insurance company. The expected profitability of plan assets has been calculated as agreed profitability. This profitability was approximately 4.13% in FY08 (3.65% in FY08), according to the insurance companys certificate. 2.12.2. ther long-term compensation O 2.12.2.1. Early retirement In 1999 and 2002 and 2003, the Bank offered some of its employees the chance to finish work before having reached the age established in the current employment Collective Bargaining Agreement. Early retirement commitments, up until the effective retirement date, are accounted for using the same criteria explained above for defined benefit post-employment commitments. The Bank has outsourced, via a collective immediate income insurance policy with Zurich Life Espaa, Compaa de Seguros y Reaseguros, S.A. (unrelated entity), which meets the requirements set out in Royal Decree 1588/1999 of 15th October, its salary commitments with staff that have retired early both in terms of salaries and other corporate charges from when they retire early until the date of their effective retirement. In FY09 and FY08 no amount was paid out for this item.
74
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
During FY09, an early retirement process was started, affecting 14 employees. The workers that this process affects will be taken off the payroll in 2010. The commitment that the Bank has assumed amounts to 1,883 thousand, which is posted in Provisions - Provisions for pensions and similar obligations on the balance sheet (see Note 20). The expense resulting from the aforementioned commitment is posted in Administration Costs - Personnel Costs on the statement of income (see Note 33). The early retirement commitments in 2010 are accounted for using the same criteria as described for the defined-benefit commitments, except the past service cost, which is recorded immediately in the year in which it is incurred. 2.12.2.2. Death and disability of current employees The Banks commitments to cover eventualities relating to death and disability of employees during the period in which they are employed are covered by insurance policies with Allianz Compaa de Seguros y Reaseguros, S.A. and Aegon Seguros de Vida, Ahorro e Inversin, S.A. In FY09, the amount that the Bank paid for this item totalled 758 thousand (130 thousand in FY08), which is recorded in Administration costs - Personnel costs on the statement of income for those years (see Note 33). On 21 December 2007, the Bank signed an outsourcing policy with Allianz Compaa de Seguros y Reaseguros, S.A. to supplement the commitments covered by the aforementioned policies in force, for widows, orphans and disability benefits in the process of being paid. The amount that the Bank paid for this item totalled 477 thousand (286 thousand in FY08), which is recorded in Administration costs - Personnel costs on the 2009 statement of income (see Note 33). Also, on 15 February 2007, the Bank signed an insurance policy to cover death and disability for Management staff, for the time that they work for the company, with Nationale-Nederlanden Vida, Ca. de Seguros y Reaseguros, S.A.E. (unrelated company) The amount that the Bank paid for this item totalled 370 thousand (372 thousand in FY08), which is recorded in Administration costs - Personnel costs on the 2009 statement of income (see Note 33). 2.13. Income tax Income tax expense in each year is consolidated on the statement of income except when it is a result of a transaction with the profits/losses recorded directly in net equity. In this case, income tax is also recorded in equity. Income tax expense for the year is calculated as tax to pay with regards the years tax profit/loss, adjusted for the variations amount produced during the year in recorded assets and liabilities and resulting from temporary differences, credits through tax deductions and rebates and possible tax losses (see Note 24).
ANNUAL ACCOUNTS
75
The Bank believes there to be a temporary difference when there is a difference between the book value and the tax base of a capital item. The tax base of a capital item is the amount attributed to the item for tax purposes. A taxable temporary difference is one that will generate the Banks obligation to make a payment to the Government in the future. Deductible temporary differences are those that will generate a repayment right or a lesser payment to the Government in the future. Credits through deductions and rebates and tax loss credits are amounts which, when the activity has been undertaken or the profit/loss has been obtained to generate the right, are not applied for tax purposes in the tax return until the determining factors set out in tax legislation for this purpose have been complied with, taking into account the fact that it is probable that they will be applied in future years. Tax asset and liability receivables are those that were expected to be recovered or paid by the Government, respectively, in a period of time that does not exceed 12 months from the recording date. On the other hand, deferred tax assets or liabilities are those that it is expected will be recovered or paid, respectively, by the Government in future years. Deferred tax assets or liabilities for all taxable temporary differences are recorded. Despite this, deferred tax liabilities due to posting goodwill are not recorded. The Bank only records deferred tax assets originating from deductible temporary differences, credits for deductions or rebates or for the existence of tax losses if the following conditions are met: It is likely that the Bank will have enough tax gains in the future against which the assets may be made effective. These have been produced for identified reasons that will probably not be repeated in the case of deferred tax assets originating from tax losses. Neither assets nor liabilities originating from deferred tax are recorded when a capital item is initially recorded that does not arise in a business combination and which, when it is recorded, has not affected the accounting or tax profit/loss. At each accounting year-end, the recorded deferred tax is revised (both assets and liabilities) in order to check that it remains in force, and the necessary changes are carried out in accordance with the results of the analysis undertaken.
76
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
2.14. Tangible assets Tangible assets for own use Tangible assets for own use includes those assets, owned or acquired under finance leases, that the Bank has for its own current or future use for administrative purposes or for the production or supply of goods and which are expected to be used during more than one financial year. Some of the tangible assets included in this tier are those that the Bank receives for the settlement, in whole or in part, of financial assets that represent claims against third parties that are expected to be for own and continued use. Tangible assets for own use are accounted for at their acquisition cost, re-valued, as applicable, in accordance with current legislation. This is made up of the fair value of any consideration given, plus the set of monetary payments made or committed, less: Its accrued depreciation. If applicable, the estimated losses resulting from a comparison of the net carrying amount of each element with its recoverable amount. The depreciation of these assets is carried out in accordance with their estimated years of useful economic life, applying the cost of acquisition of these assets less their remaining value (considering that the lands on which the buildings and other constructions are built have an indefinite life and, therefore, are not considered in depreciation terms) and the following annual percentages:
Annual depreciation percentage
Buildings for own use Furniture Fixtures IT equipment and facilities 2% - 3% 10% - 16% 4% - 16% 25%
The annual allocations that the Bank makes in terms of tangible asset depreciation are recorded in Depreciation Tangible assets on the statement of income. At each accounting year-end, the Bank analyses if there are indications, both internal and external, that the net value of its tangible assets exceeds their recoverable amount; in this case, the assets carrying amount is reduced to its recoverable amount. Simultaneously, future charges are revised in terms of depreciation in proportion to their revised book amount and their new remaining useful economic life if a re-estimate is needed, allocating and charging the impairment loss against Impairment losses on other assets (net) on the statement of income. Similarly, when there are indications that the value of an impaired asset has been recovered, the reversion of the impairment loss accounted for in previous periods is credited to Impairment losses on other assets (net) on the statement of income, duly revising future amortisation charges. Impairment loss reversion can never imply an increase in the assets book value that is higher than the value it would have if impairment losses had not been consolidated in previous years.
ANNUAL ACCOUNTS
77
Likewise, the useful economic life of tangible assets for own use is revised at least once a year in order to detect any significant changes to the assets, which, if applicable, are adjusted by offsetting the allocation charged against the statement of income in future years. Costs relating to the preservation and maintenance of tangible assets for own use are charged against the profit/loss for the year in which they are incurred in Administration costs - Other general administration costs on the statement of income. Financial costs owing to the financing of tangible assets for own use are posted in the statement of income when payment occurs, not forming part of the acquisition cost. 2.15. Intangible assets 2.15.1. Other intangible assets Intangible assets are considered non-monetary, identifiable assets, without physically appearing, which arise due to legal business or that the Bank has developed internally. Only intangible assets with a cost can be estimated reasonably objectively and with which the Bank thinks it is likely to obtain future financial rewards are posted in the accounts. Intangible assets are recorded at the acquisition or output cost, net of the accrued depreciation and possible impairment losses they might have suffered. Intangible assets with a defined useful life are depreciated in accordance with this, applying similar criteria to those used for the depreciation of tangible assets (see Note 2.14). Annual depreciation of intangible assets with a defined useful life is recorded in Depreciation - Intangible assets on the statement of income. This heading of the balance sheets includes payments made to third parties for the acquisition and development of IT systems and programmes for the Bank, net of accrued depreciation. These assets are depreciated using the linear method over a maximum of three years. 2.15.2. Goodwill On 30 November 2007, BNP Paribas Espaa, S.A. (hereinafter, BNP) gave the Bank a business unit with all of its assets, property, rights and obligations and, as a supplier, the transferred customers of private banking services and products (asset management, allocation of investment funds, structured products, deposits, current accounts, loans and credits). BNP also gave the Banks controlled company, Galeban Gestin de Riesgos, S.A. (see Note 12) its contractual position for allocation of part of the insurance and pension portfolio with two insurance companies. This transaction generated goodwill that is not depreciated systematically; instead, its valuation is analysed on an annual basis, posting any signs of impairment in the statement of income.
78
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
In accordance with the estimates and forecasts available to the Banks Directors, the cash flow forecasts for the cash generating units or groups of these, to which this goodwill has been allocated, allow the goodwill value in use recorded as at 31 December 2009 to be recovered. This is considered to the current value of the estimated future cash flows that it helps to generate. To calculate these flows, the Banks Directors use result forecasts for the next 5 years, having considered perpetual income from then onward. The results for the next 5 years were discounted from the interbank interest rate at one year plus a 13 bp risk premium. The perpetual income was discounted with 30-year debt, with a -1% growth rate and 13 bp risk premium. To calculate the result for the next 5 years, the real turnover data on 31 October 2009 was taken. Having later realised that this did not significantly differ from the data that existed as at 31 December 2009, it was thought that the turnover dropped by 1% and margins were applied in accordance with those that existed on 31 October 2009 for those business units, considering the same rate variation estimate as in our interest rate risk analysis. 2.16. Provisions and contingent liabilities Provisions are current obligations that arise as a result of past events out of which capital damages for the Bank could occur, which are considered probable in terms of their occurrence and specific in terns of their type, but indefinite in terms of their amount and cancellation. Contingent liabilities are possible obligations that arise as a result of past events, which will be realised depending on whether one or more future events happen, or not, out of the Banks control. They include current Bank obligations for which payment is not likely to cause a reduction in resources that include financial rewards or whose amount cannot be quantified reliably. The financial statement includes all main provisions for which it is thought that it is more likely than not that the obligation will have to be met. Contingent liabilities are not recorded in the financial statement, but information is given on them in the Annual Report, if applicable. Provisions, which are quantified by bearing in mind the best available information on the consequences of the associated event and which are re-estimated at accounting year-end, are used to face up to the specific obligations for which they were originally recognised; there reversion takes place, in whole or in part, when the aforementioned obligations no longer exist or decrease. Accounting of provisions deemed necessary in accordance with the above criteria are charged or credited to Provisioning expenses (net) on the statement of income.
ANNUAL ACCOUNTS
79
Legal procedures and/or open claims As at the 2009 year-end, there were different legal procedures and claims underway against the Bank originating from the normal operation of its activities. The Banks legal advisors and its Directors do not think that the conclusion of these procedures and claims will have any significant effect on the financial statement. 2.17. Temporary acquisition (transfer) of assets Purchases (sales) of financial instruments with a non-optional reversal agreement at a set price (repos) are recorded as investment granted (received) depending of the type of debtor (creditor), under the Loans and advances to credit institutions or Loans and advances to other debtors (Deposits from credit institutions or Deposits from other creditors) in the assets and liabilities, respectively, of the balance sheets. The difference between purchase and sale prices is recorded as financial interest during the contracts life. 2.18. Non-current assets held for sale The Non-current assets held for sale caption of the balance sheet includes the carrying amount of securities individual or integrated in a set (disposal group) or which form part of a business unit that aims to dispose (interrupted transactions), whose sale is highly probable in the conditions in which these assets are currently found, within one year from the date referred to in the financial statement. Recovery of the book value of these items which could be financial or non-financial is therefore expected to take place using the price obtained during disposal, rather than through their continued use. More specifically, intangible assets and other non-current assets that the Bank received to settle, in whole or in part, the payment obligations of its loans are considered non-current assets held for sale; except when the Bank decided to continue using these assets (see Note 2.14). Generally speaking, assets classified as non-current assets held for sale are accounted for using the lowest amount out of their book value when they are considered as such and their fair value, net of estimated sales costs. While they remain classified in this tier, the tangible and intangible assets that can be depreciated by type, are not depreciated. If the book value of these assets exceeds the fair value, net of sales costs, the Bank revises this book value with a balancing entry in the Gains/losses on non-current assets held for sale not classified as interrupted transactions in the statement of income. If there are subsequent increases in the fair value of the assets, the Bank reverts back to the previously posted losses, increasing their book value with a limit equal to the amount at which they were posted prior to their impairment, with a balancing entry in the same heading of the statement of income.
80
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
2.19. Own equity instruments Own equity instruments are those which meet the following conditions: They do not include any obligation for the issuer that involves: (i) giving cash or another financial asset to a third party; or (ii) swapping financial assets or liabilities with third parties in potentially unfavourable conditions for the issuer. They can be, or they will be, settled with the issuers equity instruments: (i) when it is a non-derivative financial instrument, it will not represent an obligation of providing a variable number of its own equity instruments; or (ii) when it is a derivative, provided that it is settled for a fixed cash amount or another financial asset, in exchange for a fixed number of its own equity instruments. Transactions with own equity instruments, including issuing and depreciation, are posted directly against net equity. Changes in value of instruments classified as own equity are not posted in the financial statements; instead, the considerations received or given in exchange for those instruments are directly added to or deducted from the net equity. 2.20. Compensation for dismissals In accordance with current legislation, the Bank is liable to compensate those employees who are unfairly dismissed. There is no staff downsizing plan that requires the allocation of a provision for this item. 2.21. Cash flow statements The following expressions are used in the cash flow statements in the following way: Cash flows: inflow and outflow of cash and cash equivalents; this is understood as short-term, high liquidity investments with low risk of changes to their value. Operating activities: typical credit institution activities, as well as other activities that cannot be described as investing or financing. Investing activities: activities relating to long-term acquisition, disposal or disposition of assets via other means and other investments not included in cash and cash equivalents. Financing activities: activities that produce changes in the size and make-up of net equity and the liabilities that do not form part of the operating activities. For the purposes of the cash flow statement, cash and cash equivalents refer to high liquidity, short-term investments with low risk of changes to their value. The Bank considers cash or cash equivalents to be the cash that the Bank owns, which is posted in Cash and balances with central banks on the balance sheets.
ANNUAL ACCOUNTS
81
2.22. Statement of consolidated income and expenditure In this statement the following is shown: a) Profit/loss for the financial year. b) The net amount of the income and expenditure consolidated temporarily as net equity valuation adjustments. c) The net amount of income and expenditure consolidated permanently in net equity. d) Income tax accrued on the items specified in b) and c) above. e) The total consolidated income and expenditure calculated as the sum of the above letters. Changes to consolidated income and expenditure in net equity as valuation adjustments are broken down into: a) Valuation gains/losses: includes the amount of income, net of the expenses incurred during the year, directly consolidated in net equity. The amounts consolidated during the year in this section are kept in it, although during that year they are transferred to the statement of income or are reclassified in another section. b) Amounts transferred to the statement of income: includes the amount of valuation gains or losses previously consolidated in net equity, even if in the same year they are consolidated in the statement of income. c) Amount transferred at the initial value of the hedged items: includes the amount of valuation gains or losses previously consolidated in net equity, even if in the same year they are consolidated at the initial value of the assets or liabilities as a result of cash flow hedges. d) Other reclassifications: includes the amount of transfers made during the year between valuation adjustment headings in accordance with legally established criteria. 2.23. Total statement of changes in net equity This statement shows all of the changes in net equity, including those originating in changes to accounting principles and correction of errors. This statement therefore shows a reconciliation of the book value at the start and end of the year for all of the net equity headings, grouping the activity depending on its type in the following headings: a) Revisions due to changes in accounting principles and correction of errors: which includes changes in net equity arising from the retrospective restatement of the financial statement balances originating in changes in accounting principles or correction of errors. b) Income and expenditure consolidated during the year: includes the aggregate total of the amounts posted in the statement of consolidated income and expenditure mentioned above.
82
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
c) Other changes in net equity: includes other amounts recorded in net equity, such as increases or reduction in the provisioning expense, allocation of profit/loss, transactions with own equity instruments, payments with equity instruments, transfers between net equity headings and any other increase or reduction in the net equity.
3. Allocation of the Banks profits and earnings per share

3.1. Distribution of the Banks profits Details of the Banks net profit allocation proposal for 2009, which its Board of Directors will present to the General Shareholders Meeting for approval, and the profit allocation for 2008 approved at the General Shareholders Meeting, are as follows:
2009
To the legal reserve To other reserves To dividends 1,168 4,962 5,546
2008
1,261 7,321 4,026
Net profit
11,676
12,608
b) Earnings per share i. Basic earnings per share The basic earnings per share are calculated by dividing the net profit for a year by the average weighted number of shares in circulation that year, excluding the average number of treasury shares held during the year. In accordance with the foregoing:
2009
Net profit for the year Number of shares in circulation at the end of the period Average number of shares in circulation Weighted average of treasury shares Revised number of shares 11,676 19,807,328 19,807,328 (55,734) 19,751,594
2008
12,608 19,807,328 13,915,819 (43,922) 13,871,897
Basic earnings per share (euros)
0,5911
0,9089
ii. Diluted earnings per share To calculate the diluted earnings per share, both the amount of the income attributed to ordinary shareholders and the weighted average of the shares in circulation, excluding treasury shares, must be revised due to all of the diluted effects inherent in the potential ordinary shares (share options, warrants and convertible debt). As at 31 December 2009 and 2008, the Bank held no issues that could be converted into shares nor did it grant privileges or rights that could under any circumstances make them convertible into shares, resulting in no dilutive effects.
ANNUAL ACCOUNTS
83
The diluted earnings per share for FY09 and FY08 were therefore calculated as follows:
2009
Net profit for the year Dilutive effect of changes in profit for the year resulting from the potential conversion of ordinary shares 11,676 11,676 Average weighted number of shares in circulation, excluding treasury shares Dilutive effect of: Share rights Average weighted number of shares for calculation 19,751,594 19,751,594
2008
12,608 12,608 13,871,897
13,871,897
Diluted earnings per share (euros)
0,5911
0,9089
4. Compensation for the Board of Directors and Senior Management

4.1. Compensation for the Board of Directors The following table shows a breakdown of the compensation paid to former and current members of the Banks Board of Directors, purely in their capacity as Directors, during 2009 and 2008 (data in thousands of euros):
2009
Mr. Juan Manuel Urgoiti Lpez-Ocaa Mr. Julio Fernndez Gayoso Mr. Antonio Gerardo Abril Abadn Mr. Ramn Francisco Bahamonde Santiso Mr. Epifanio Campo Fernndez Mr. Gregorio Gorriarn Laza Mr. ngel Lpez-Corona Dvila Mr. Jos Luis Losada Rodrguez Mr. Isaac Alberto Mguez Lourido Mr. Jos Luis Pego Alonso Mr. scar Rodrguez Estrada Mr. Ignacio Santillana del Barrio Mr. Javier Ungra Lpez Mr. lvaro Urgoiti Gutirrez Mr. Ramiro Mato Garca-Ansorena Mr. Saturnino Cuquejo Iglesias 59 67 17 42 17 42 36 42 17 25 17 17 42 17 17 17
2008
59 73 15 44 15 44 44 44 15 15 15 15 44 15 12 15
Total
491
484
84
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
4.2. Compensation for Senior Management When drafting these consolidated annual accounts, the Groups Senior Management was considered to consist of the Banks Chairman and CEO, who are also Board Directors (see Note 4.1.), and 6 General Deputy Managers because these are the key posts for this purpose. Compensation paid to Senior Management members, as defined above, during FY09 and FY08 totalled 2,651 and 3,041 thousand, respectively. These amounts include all salary items, fixed and variable, including seniority, received in both years, as well as annual expenses corresponding to the specifications relating to complementary hedging instruments for pension commitments (Note 4.4). All these details are stated in the Collective Agreements, company or contractual terms and other similar agreements. The groups average age is 54 and the average period of seniority in the Bank is 19 years. 4.3. Other transactions carried out with members of the Board of Directors and Senior Management In addition to the compensation paid to members of the Banks Board of Directors and Senior Management as indicated above (see Notes 4.1. and 4.2.), details of asset and liability balances that the Bank held these groups at 2009 and 2008 year-ends, as well as income and expenses originating from transactions carried out with this group by the Group during those years, are as follows (data in thousands of euros):

Mr. Juan Manuel Urgoiti Lpez-Ocaa Mr. Julio Fernndez Gayoso Mr. Antonio Gerardo Abril Abadn Mr. Ramn Francisco Bahamonde Santiso Mr. Epifanio Campo Fernndez Mr. Gregorio Gorriarn Laza Mr. ngel Lpez Corona Dvila Mr. Jos Luis Losada Rodrguez Mr. Isaac Alberto Mguez Lourido Mr. Jos Luis Pego Alonso Mr. scar Rodrguez Estrada Mr. Ignacio Santillana del Barrio Mr. Javier Ungra Lpez Mr. lvaro Urgoiti Gutirrez Mr. Saturnino Cuquejo Iglesias Mr. Ramiro Mato Garca-Ansorena Mr. Jos Carlos Cordero de la Lastra
Assets Loans and receivables 2009

1,345 1,584 306 818 199 193
Liability - Loans 2009

167 1,079 44 121 50 940 2 59
Off-balance sheet risk 2009

12 5
2008
1,042 500 1,047 306 858 1,064 219
2008
120 369 6 179 22 225 26 43
2008
12 13
ANNUAL ACCOUNTS
85
(Contd)
Assets Loans and receivables 2009

159 471 504 521 780
Liability - Loans 2009

36 21 37 15 24
Off-balance sheet risk 2009

2008
173 494 541 494 810
2008
13 27 25 2 122
2008

Mr. Isaac Snchez Monge Mr. Francisco Javier Alonso Muoz Mr. Manuel Prol Cid Mr. Fernando Ortega Cambara Mr. Joaqun Espallargas Iberni
Financial income
Mr. Juan Manuel Urgoiti Lpez-Ocaa Mr. Julio Fernndez Gayoso Mr. Antonio Gerardo Abril Abadn Mr. Ramn Francisco Bahamonde Santiso Mr. Epifanio Campo Fernndez Mr. Gregorio Gorriarn Laza Mr. ngel Lpez Corona Dvila Mr. Jos Luis Losada Rodrguez Mr. Isaac Alberto Mguez Lourido Mr. Jos Luis Pego Alonso Mr. scar Rodrguez Estrada Mr. Ignacio Santillana del Barrio Mr. Javier Ungra Lpez Mr. lvaro Urgoiti Gutirrez Mr. Saturnino Cuquejo Iglesias Mr. ngel Varela Varas Mr. Ramiro Mato Garca-Ansorena Mr. Jos Carlos Cordero de la Lastra Mr. Isaac Snchez Monge Mr. Francisco Javier Alonso Muoz Mr. Manuel Prol Cid Mr. Fernando Ortega Cambara Mr. Joaqun Espallargas Iberni
Financial expenses 2009

6 6 1 5 1 1
Income from commission 2009

3 2
Gains and losses on financial assets and liabilities 2009

57 1 51 5 45 46 2 1 11 12 14 20
2009
63 7 48 6 45 51 3 2 11 12 12 20
2008
37 53 47 7 44 66 6 2 10 11 10 19
2008
3 16 1 18 2 2 1 1
2008
3 1 2
2008
34 37 50 6 45 48 6 (2) 9 11 12 18
Loans and credits granted to former and current members of the Board of Directors and to companies linked to them accrue annual interest of between 2.75% and 5.41% Transactions carried out with Bank employees, who are in turn members of Senior Management, accrue annual interest of between 1% and 3%, who, as employees, are subject to the conditions set out in current employment agreements for all Bank staff.
86
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
4.4. Commitments accrued in terms of pensions and insurance The amount of commitments accrued in terms of pensions with previous and current members of the Banks Board of Directors (current and retired workforce) and Senior Management members amounts to 12,034 thousand at the end of FY09 (10,044 thousand as at 31 December 2008), which is covered by four insurance policies held with Zurich Life Espaa, Compaa de Seguros y Reaseguros, S.A., Axa Aurora Vida, S.A. de Seguros y Reaseguros, Nationale-Nederlanden Vida, Ca. de Seguros y Reaseguros, S.A.E. and Allianz Compaa de Seguros y Reaseguros, S.A. (see Note 2.12). As at 31 December 2009 and 2008, there was no other commitment or guarantee of any kind other than those identified in the previous paragraphs with former or current members of the Banks Board of Directors, nor with Senior Management.
5. Cash and balances with central banks

The breakdown of this heading on the balance sheets is:
2009
Cash Balances with Bank of Spain 20,339 50,167
2008
20,386 45,273
70,506
65,659
Note 41 includes details of term to maturity of these assets at the 2009 and 2008 year-ends, as well as their average interest rates for those years.
6. Loans and advances to credit institutions

The breakdown of balances in this section of the balance sheets, in accordance with the classification, type and currency of the transactions, is as follows:
2009
Classification: Loans and receivables 61,581 61,581 Type: Temporary acquisition of assets Other accounts 26,945 34,636 61,581 Currency: Euro Foreign currency 54,402 7,179 61,581 Plus: Valuation adjustments Accrued interest 294 61,875
2008
200,534 200,534
157,086 43,448 200,534
197,311 3,223 200,534
386 200,920
Note 41 includes details of term to maturity of these assets at the 2009 and 2008 year-ends, as well as their average interest rates for those years.
ANNUAL ACCOUNTS
87
As at 31 December 2009 and 2008, the Bank held no pledged deposits on financial assets and liabilities against CECA banking facilities.
7. Debt securities
The breakdown of balances in these headings of the balance sheets, in accordance with the classification, type, listing and currency of the transactions, is as follows:
2009
Classification: Available-for-sale financial assets Other financial assets at fair value through profit and loss Held-to-maturity investments (Note 18) 172,100 1,565 302,538 476,203 Type: Spanish Government securities Other recorded debt Foreign Government securities Issued by financial institutions Hybrid financial assets Other fixed-rent securities 56,182 193 31,672 1,565 386,591 476,203 Listing: Listed 476,203 476,203 Currency: Euro Foreign currency 467,085 9,118 476,203 Plus: Valuation adjustments Allowance for impairment losses Microhedge transactions (10,782) 2,876 468,297
2008
410,263 9,677 419,940
87,157 2,240 239,998 9,677 80,868 419,940
419,940 419,940
406,792 13,148 419,940
(2,622) 4,179 421,497
As at 31 December 2009 and 2008, the Bank did not have debt securities relating to own or third party commitments. Within the assets recorded in Available-for-sale financial assets in the table above, the Bank had a cash amount of 32,794 thousand granted to customers at 31 December 2008 (201,079 thousand at 31 December 2008), which is recorded under Financial liabilities at amortised cost - Deposits from other creditors on the balance sheets (see Note 18).
88
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
Note 41 to the Annual Report includes details of term to maturity of these assets at the 2009 and 2008 year-ends, as well as their average interest rates for those years. The activity in this section during 2009 and 2008 is as follows:
2009
Balance at start of the year Additions Sales and depreciations Allowance for cost Exchange rate differences Variations in value adjustments Due to variations in net equity Due to variations in microhedges Due to impairment 21,988 (1,304) (8,160) 421,497 734,076 (701,265) 2,939 (1,474)
2008
370,155 429,583 (357,131) (64,594) 690
42,794
Balance at end of the year
468,297
421,497
ANNUAL ACCOUNTS
89
The net capital gains obtained in FY09 on the sale and purchase of these assets stood at 293 thousand (128 thousand in FY08), which are recorded in the Gains/ losses on financial assets and liabilities (net) - Financial instruments not accounted for at fair value through profit and loss heading of the statement of income (see Note 31). Details of activity in the provisions for impairment losses of debt securities during 2009 and 2008 are as follows:
2009
Balance at start of the year Allocation charged against the years profit/loss 2,622 8,160
2008
1,842 780
10,782
2,622
8. Equity instruments
The breakdown of these headings of the balance sheet by classification, listing, type and transaction currency is as follows:
2009
Classification: Trading portfolio Available-for-sale financial assets 107 48,988 49,095 Listing: Listed Not listed 43,638 5,457 49,095 Type: Spanish company shares Foreign company shares Shares in investment funds 34,557 6,850 7,688 49,095 Currency: Euros Foreign currency 48,652 443 49,095 Less: Valuation adjustments (11,263) 37,832
2008
42,964 42,964
35,302 7,662 42,964
35,437 4,089 3,438 42,964
41,732 1,232 42,964 (14,484) 28,480
90
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
The activity in these headings of the balance sheet during FY09 and FY08 is as follows:
2009
Balance at start of the year Purchasing Sales Exchange rate differences Allowance for cost Valuation adjustments 28,480 71,737 (65,407) (109) (90) 3,221
2008
27,656 94,510 (73,384) 151 (27,316) 6,863
37,832
28,480
In FY09, the Bank received 1,048 thousand as dividends and other return on equity instruments (733 thousand in FY08), which are included under Return on equity instruments in the statement of income (see Note 28). The net capital gains obtained in FY09 on the sale and purchase of these assets stood at 264 thousand (360 thousand in FY08), which are recorded in the Gains/losses on financial assets and liabilities (net) - Financial instruments not accounted for at fair value through profit and loss heading of the statement of income (see Note 31). Equity instruments for which the fair value cannot be determined in a sufficiently objective manner are accounted for at cost, excluding possible impairments to their value and calculated in accordance with the criteria stated in Note 2.8. If the Bank cannot calculate the fair value of unlisted assets in this portfolio using objective criteria, the most cautious criterion is applied, which consists of valuing them at the corrected cost based on the controlled companys theoretical accounting value.
9. Loans and advances to other debtors

9.1. Breakdown The following is a breakdown of the balance in this heading, including the Banks exposure to credit risk for its main activity, by type of instrument and status, borrowers sector, borrowers residence, currency and type of transaction interest rate:
ANNUAL ACCOUNTS
91
2009
By type and status: Commercial loans Secured loans Loans on demand and miscellaneous Other long-term loans Impaired assets 156,498 2,141,381 239,279 788,539 146,993 3,472,690 By borrowers sector: Spanish Public Administrations Other resident sectors Non-resident 16,356 3,436,317 20,017 3,472,690 By geographical area: Spain European Union (except Spain) United States of America and Puerto Rico Other OECD countries Latin America Rest of the world 3,452,656 9,630 4,639 2,388 3,149 228 3,472,690 By currency: Euros Foreign currency 3,440,837 31,853 3,472,690 By interest rate type: Fixed interest rate Variable interest rate 856,807 2,615,883 3,472,690 Less: Valuation adjustments Impairment losses Accrued interest Commissions (88,387) 10,237 (11,750) 3,382,790
2008
211,635 2,009,886 269,955 886,096 79,078 3,456,650
16,144 3,418,406 22,100 3,456,650
3,434,580 10,140 4,573 2,179 707 4,471 3,456,650
3,421,928 34,722 3,456,650
788,558 2,668,092 3,456,650 (76,633) 13,385 (13,136) 3,380,266
Note 41 to the Annual Report includes details of term to maturity of these assets at the 2009 and 2008 year-ends, as well as their average interest rates for those years. As at 31 December 2009 and 2008, there were no loans and advances to other debtors of undetermined duration for significant amounts.
92
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
In addition, the Banks securitised loans as at 31 December 2009 and 2008, and which meant them being written off the balance sheet, amounted to 38,519 and 45,281 thousand. The Directors think that all of the necessary conditions have been met for these loans to be written off the balance sheet, in particular, no subordinate financing has been held nor has any type of credit enhancement been granted. In addition, during FY09 the Bank securitised loans totalling 135,000 thousand, the balance of which was 120,174 thousand as at 31 December 2009. This transaction did not involve the write-off of the aforementioned credits from the balance sheet. The Bank has not financed third party acquisition of its own shares or granted loans to third parties with the guarantee of Bank shares. b) Impairment The following is a breakdown of the balance of provisions covering impairment losses during 2009 and 2008:
2009
Balance at start of the year Allocation charged against the years profit/loss Determined individually Determined together Uses of insolvency funds Transfer of funds (Note 11) Net allocations for the year Exchange rate differences 39,795 (13,971) (13,997) (71) 11,756 (2) 76,633
2008
73,762
26,809 (18,133) (5,819) 2,857 14
Year-end balance
88,387
76,633
Suspended assets recovered in FY09 and 2008 amount to 482 and 386 thousand respectively, which are recorded by deducting the balance from Impairment losses (net) - Loans and receivables in the statement of income (see Note 42). Likewise, this heading includes depreciation of credits considered as suspended assets, increasing the heading by the 14,597 and 6,206 thousand in FY09 and 2008 respectively. During the year credit balances relating to suspended assets were also adjusted, amounting to 472 thousand euros (315 thousand in FY08) On 1 August 2008, the Bank signed an agreement with Aktiv Kapital Portfolio Investments, A.G., to assign 3,626 suspended credits, representing a total of 30,465 thousand (see Note 42). The amount charged for this assignment was 1,219 thousand and they are posted in the heading Gains due to the write-off of assets not classified as current and held for sale in the 2008 statement of income.
ANNUAL ACCOUNTS
93
c) Impaired assets Details of financial assets classified as loans and receivables and considered impaired due to their credit risk as at 31 December 2009, classified by geographical area where the risks are located and in accordance with the time lapsed at that date, since the expiry of the oldest unpaid amount in each transaction, are as follows: As at 31 December 2009
Between 3 and 6 months
Spain European Union (except Spain) Rest of countries 32,395 123 In thousands of euros

41,816 828 8

41,722 293 30

19,999
More than 24 months

9,775 4
Total
145,707 1,244 42
32,518
42,652
42,045
19,999
9,779
146,993
As at 31 December 2008
Spain European Union (except Spain) Rest of countries 24,887 308

20,833

10,989 65 1

9,024 26
More than 24 months

12,945
Total
78,678 373 27
25,195
20,833
11,055
9,050
12,945
79,078
The Impaired assets balance in the above table includes secured risks amounting to 50,306 thousand (15,888 thousand at the 2008 year-end). As at 31 December 2009, renegotiations without guarantee improvement were still in default and they were not significant on that date. The renegotiations that improved guarantees and previously paid interest were not significant at the time of the analysis either. The amount of the assets that, not being considered impaired, have a past-due amount on that date total 6,291 thousand euros (55,429 as at 31 December 2008). The following is a breakdown of these assets by periods for FY09 and FY08:
Less than 1 month

Balances as at 31 December 2009 Balances as at 31 December 2008 22,091 28,261
More than 1 month but less than 2 months

5,333 11,809
More than 2 months but less than 3 months

18,867 15,359
Total
46,291 55,429
94
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
10. Derivatives
10.1. Hedge derivatives Fair value hedges The following is a breakdown of fair and notional values of derivatives designed as hedging instruments in fair value hedging transactions at 31 December 2009 and 2008 by type of product:
2009 Assets Fair value

Purchase/sale of foreign currencies (not expired): Purchase of foreign currencies against euros Sale of foreign currencies against euros Options on securities: Bought Issued Other interest rate options: Financial swaps on interest rates and exchange rates (CCS) 15,340 143,953 11,402 323,983 21,126 6,853 8,719 6,853 130,982 9,377
2008 Liabilities Assets Fair value Notional Liabilities Fair value Notional
Notional
Fair value
Notional
67 609
21,042 18,253
30 127
13,295 9,538
34,383
37,984
9,214
9,376
162,437
308,816
17,370
234,907
22,869
191,967
18,412
477,798
30,503
352,413
26,746
435,328
The notional amount of completed contracts does not imply the actual risk that the Bank assumes as regards the aforementioned instruments. As at 31 December 2009 and 2008, the Bank had interest rate swap transactions contracted with solvent counterparts with a fair value, on those dates, amounting to 2,876 and 4,179 thousand respectively, which had been designated as hedging instruments for the existing interest rate risk on the Banks bonds and written at a fixed interest rate, which, on those dates, were classified as Available-for-sale. 10.2. Trading derivatives The following is a breakdown, by type, of the fair and reasonable value of trading derivatives in the Banks possession as at 31 December 2009 and 2008:
ANNUAL ACCOUNTS
95
2009 Assets Fair value

Futures: Sold Bought Options on securities: Bought Issued Other interest rate options: Financial swaps on interest rates and exchange rates (CCS) 2,184 65,566 1,691 33,673 1,670 558 36,781 146 14,353 112 43 4 61 298 3,748 51 1,458
2008 Liabilities Assets Fair value Notional Liabilities Fair value Notional
Notional
Fair value
Notional
161
7,720
44,554 1,000
622
3,319
22,000
1,900
37,166
2,807
106,393
1,888
49,484
1,825
67,554
2,683
48,205
The following is a breakdown of the fair value of trading derivatives that the Bank took out as at 31 December 2009 and 2008, classified in accordance with the inherent risks:
2009 Debit balance

Interest rate risk Exchange rate risk Price risk 2,245 150 412
2008 Credit balance

1,765 123
Debit balance
1,670 43 112
Credit balance
1,927 109 647
2,807
1,888
1,825
2,683
In the case of fair value hedges, the information on gains or losses on the hedge instrument and the hedged item that is attributed to the hedged risk appears netted off in Note 31 Gains/losses on assets and liabilities in the statement of income.
11. Non-current assets held for sale

Details on the balances relating to these headings in the balance sheets are as follows:
2009
Assets originating from contract awards: Residential assets Industrial assets Agricultural assets Other assets Total gross Less - impairment losses 1,548 45 101 437 2,131 (293)
2008
227 45 104 147 523
Total net
1,838
523
96
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
In FY09 and 2008, the Bank had not carried out non-current assets held for sale sales transactions nor group dispositions in transactions in which the Bank financed the established sales cost for the buyer. Activity in FY09 and FY08 in terms of impairment losses of the above table is as follows:
2009
Balance at start of the year Allocation charged against the years profit/loss Transfer of insolvency funds (Note 9) 222 71
2008
Total gross
293
The fair value of tangible fixed assets and non-current assets held for sale was determined as follows: Regarding assets for which there is no up-to-date valuation performed by a valuer who the Bank of Spain has authorised due to being insignificant, the fair value included has been taken from the Banks estimates considering mortgage market data in relation to price trends for the Banks similar tangible assets. Regarding assets for which there is an up-to-date valuation performed by a valuer who the Bank of Spain has authorised, the fair value is the value taken from this valuation, in accordance with OM/805/2003.
12. Equity investments

12.1. Breakdown The following is a breakdown of the Banks most significant shareholdings as at 31 December 2009 and 2008:
2009
Group companies Gest 21, S.L.U. Galeban Energa, S.A.U. Gallego Preferentes, S.A.U. Galeban Gestin de Riesgos, S.A. Gest 21 Inmobiliaria, S.L.U. Galeban 21 Comercial, S.L.U. Sociedades Fotovoltaicas (*) Less: Valuation adjustments Impairment (8,212) 10,623 61 300 14,126 2,951 1,397
2008
21,882 300 61
(82) 22,161
ANNUAL ACCOUNTS
97
In thousands of euros (Contd) Associates Inmobiliaria Valdebebas 21, S.L. Elica Galenova, S.L. Banco Gallego Vida y Pensiones, S.A. de Seguros y Reaseguros Luzentia Fotovoltaica Adara Renovables, S.L. Other associates (*) 6,000 2,000 2,254 3,197 358 91 13,900 (*) See Appendix I 6,000 24 6,024
2009
2008
All of the amounts in this heading of the balance sheets are in euros, and no company is listed. The activity in this section of the balance sheets during FY09 and FY08, without considering impairment losses, is as follows:
2009
Balance at start of the year Net increases due to merger (Note 1.9) Purchases and share capital increases Disposals 28,267 2,184 4,538 (2,254)
2008
25,267 3,000
32,735
28,267
Increases and withdrawals in FY09 In October 2009, the Bank set up Banco Gallego Vida y Pensiones, S.A. de Seguros y Reaseguros through the issue of 9,015,182 shares, with a one-euro nominal value each. On 6 November 2009, the Bank signed a private agreement with Caja de Seguros Reunidos, Compaa de Seguros y Reaseguros, S.A. (CASER) for the joint and exclusive sale and distribution of life insurance and pension funds through the Banks network of branches, subject to authorisation from the Comisin Nacional de la Competencia (Spanish Competition Authority), which was received on 2 December 2009. On 15 December 2009, the Bank and CASER recorded the private agreement in a public document and the Bank sold CASER 50% of the share capital in Banco Gallego Vida y Pensiones, S.A. de Seguros y Reaseguros, subject to administrative authorisation from the Directorate General for Insurance and Pension Funds. The Banks Board of Directors and its legal advisors considered that all of the requirements established in legislation in force to receive the authorisation were met. This transaction generated gains before tax, excluding transaction costs, totalling 17,940 thousand, which are posted under Gains/losses on derecognized assets not classified as non-current assets held for sale in the statement of income (see Note 36). The Other assets - Other accounts receivable heading of the balance sheet as at 31 December 2009 includes 12,974 thousand relating to the amount that the Bank was waiting to receive on that date (see Note 15).
98
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
Increases in FY08 On 22 December 2008, the Bank increased its shareholding in the company Inmobiliaria Valdebebas 21, S.L. by 300,000 shares, representing 13.64% of the share capital and amounting to 3,000 thousand. As at 31 December 2008, the Banks direct shareholding percentage in Inmobiliaria Valdebebas 21, S.L. was 27.28%. Appendix I contains significant information about the companies that the Bank controls directly as at 31 December 2009 and 2008. Activity in Group companies and associates Gallego Preferentes, S.A.U. specialises exclusively in issuing preference shares. Its head office is at Calle Henri Dunant 17, Madrid. The corporate purpose of Galeban Gestin de Riesgos, S.A.U consists of acting as a mediator between policyholders and insured parties with authorised insurance companies and in general the bank-owned insurance agency. Its head office is at Avenida Rubine 4, A Corua. The corporate purpose of Gest 21 Inmobiliaria, S.L.U. consists of owning shares in any type of company, financing controlled companies and rendering any types of services to assist with the management of controlled companies. Its head office is at Linares Rivas 30, A Corua. The corporate purpose of Galeban 21 Comercial, S.L.U. consists of owning shares in any type of company, financing controlled companies and rendering any types of services to assist with the management of controlled companies. Its head office is at Linares Rivas 30, A Corua. Inmobiliaria Valdebebas 21, S.L. specialises in buying and selling land and sites, urban development and division of land into plots, development, and the construction of all types of buildings to be sold. Its head office is at Calle Fernando el Santo 7, Madrid. The corporate purpose of Elica Galenova, S.L. consists of carrying out, on its own behalf or on behalf of third parties, either directly and using its own resources or indirectly by owning shares or shareholdings in other companies with a similar corporate purpose, activities relating to the analysis and design of technical projects, giving advice and modelling financial solutions and the development and management of any facilities to generate, distribute and sell electricity, from any source, especially wind power, and any similar activities related the aforementioned corporate purpose. Its head office is at Linares Rivas 30, A Corua. The corporate purpose of Banco Gallego Vida y Pensiones, S.A. de Seguros y Reaseguros is to undertake activities relating to any type of direct life insurance, including the management of pension funds and any activities related to the aforementioned ones that, according to law, are typical of insurance companies. Its head office is at Calle Henri Dunant 17, Madrid.
ANNUAL ACCOUNTS
99
The corporate purpose of Luzentia Fotovoltaica, S.L. is the ownership, administration, management and disposal of securities and company shareholdings. Its head office is at Paseo de la Castellana 14, Madrid. The corporate purpose of Adara Renovables, S.L. is the production and marketing of any kind of renewable energy and the use and recovery of waste that can generate energy. Its head office is at Plaza de Galicia 2-3, A Corua. Due to the type of headings that make up these controlled companies financial statements as at 31 December 2009, the Banks Directors do not expect any loss to their value that will make it necessary to set up an additional provision to the one included in the financial statement. In FY09, the Bank received 767 thousand in dividends from Group companies and associates (6,075 thousand in FY08), which are included under Return on equity instruments in the statement of income (see Note 28). These amounts were receivable at the 2009 and 2008 year-ends, and are posted under Other assets - Other on the balance sheet. Appendix II contains significant information about the companies that the Bank controls indirectly as at 31 December 2009 and 2008. 12.2. Impairment During FY09 activity regarding the impairment losses on these assets was as follows (in FY08 there was no activity in relation to this item):
In thousands of euros Balance as at 1 January 2009 Allocation charged against the years profit/loss 82 8,130
Balance as at 31 December 2009
8,212
13. Tangible assets

The breakdown of the balance in this heading of the balance sheets, by type, is as follows:
Net
IT equipment and facilities Furniture, vehicles and other fixtures Buildings Balances as at 31 December 2008 IT equipment and facilities Furniture, vehicles and other fixtures Buildings Balances as at 31 December 2009 15,906 51,992 11,558 79,456 16,233 65,662 30,648 112,543
Accumulated amortisation
(13,515) (24,640) (1,796) (39,951) (14,623) (28,787) (1,986) (45,396)
Net balance
2,391 27,352 9,762 39,505 1,610 36,875 28,662 67,147
The Buildings heading of the above table includes 1,527 thousand due to a property revaluation undertaken as a result of the merger in 1998 described in Note 1, and 5,696 thousand due to the property revaluation that the Bank undertook in
100
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
FY05, in accordance with legislation in force (1,527 and 5,696 thousand as at 31 December 2008). The Bank does not have any tangible fixed assets in foreign countries. As at 31 December 2009, tangible assets for own use with a gross amount of 27,140 thousand (35,284 thousand as at 31 December 2008), approximately, were fully amortised. The activity in the balance in this heading of the balance sheet for FYs 2009 and 2008 is as follows:
In thousands of euros Net Balance as at 1 January 2008 Additions Withdrawals Balance as at 1 January 2009 Additions Increases due to merger Withdrawals Balance as at 31 December 2009 Depreciations Balance as at 1 January 2008 Allocation charged against the years profit/loss Withdrawals Balance as at 31 December 2008 Allocation charged against the years profit/loss Withdrawals Balance as at 31 December 2009 Net tangible assets Balance as at 31 December 2008 Balance as at 31 December 2009 39,505 67,147 (35,300) (4,792) 141 (39,951) (5,521) 76 (45,396) 70,635 9,233 (412) 79,456 21,849 11,376 (138) 112,543
The main increases in FY09 relate to the purchase from an associate of rights to build on a plot of land in Valdebebas (Madrid) amounting to 18,328 thousand. There were also increases, due to the merger undertaken in FY09, described in Note 1, in the cost of the tangible asset of 11,376 thousand and accumulated amortisation of 463 thousand, mainly relating to solar power plants. The details of the assets transferred to the acquiring company are included in Note 45.
ANNUAL ACCOUNTS
101
14. Intangible assets

The breakdown, by classification, of the balance in this section of the balance sheets is as follows:
Net
Goodwill Other intangible assets Balances as at 31 December 2008 Goodwill Other intangible assets Balances as at 31 December 2009 2,359 34,609 36,968 2,359 42,584 44,943
(20,311) (20,311) (28,604) (28,604)
Net balance
2,359 14,298 16,657 2,359 13,980 16,339
On 30 November 2007, BNP Paribas Espaa, S.A. (hereinafter, BNP) gave the Bank a business unit with all of its assets, property, rights and obligations and, as a supplier, the transferred customers of private banking services and products (asset management, allocation of investment funds, structured products, deposits, current accounts, loans and credits). BNP also gave the controlled company, Galeban Gestin de Riesgos, S.A. its contractual position for allocation of part of the insurance and pension portfolio with two insurance companies. This transaction generated goodwill that is not depreciated systematically; instead, its valuation is analysed on an annual basis, posting any signs of impairment in the statement of income. The activity in this heading of the balance sheet during FY09 and FY08 was as follows:
Software
Balance as at 1 January 2008 Additions Withdrawals Allocation charged against the years profit/loss Balance as at 31 December 2008 Additions Allocation charged against the years profit/loss Balance as at 31 December 2009 11,857 9,326 (6,885) 14,298 7,975 (8,293) 13,980
Goodwill
2,907 (548) 2,359 2,359
The additions in the year mainly relate to software purchases for the development of IT systems and digital banking. As at 31 December 2009, some items were fully depreciated, with asset values and accrued depreciation totalling 22,175 thousand (21,882 thousand at 2008 yearend).
102
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
15. Other assets

The breakdown of the balance in this heading of the balance sheets is as follows:
2009
Paid, non-accrued expenses Transactions underway Other items Other accruals Other accounts receivable 870 2,205 2,297 331 22,036
2008
1,035 927 2,562 835
27,739
5,359
The Other accounts receivable heading above includes 12,974 thousand from the sale of 50% of the shares in controlled company Banco Gallego Vida y Pensiones, S.A. de Seguros y Reaseguros, described in Note 12, and 9,062 thousand, relating to amounts accrued but not drawn from securitisation bonds (see Note 18).
16. Other liabilities

The breakdown of the balance in this heading of the balance sheets is as follows:
2009
Paid, non-accrued expenses Other accruals 3,905 3,251
2008
2,960 3,712
7,156
6,672
17. Deposits from central banks and financial institutions (liabilities)

The breakdown of the balance in these headings of the balance sheets, in accordance with the classification, balancing entry, type and currency of the transactions, is as follows:
2009
Classification: Financial liabilities at amortised cost 771,579 771,579 Balancing entry: Financial institutions Central banks 365,546 406,033 771,579
2008
990,130 990,130
725,537 264,593 990,130
ANNUAL ACCOUNTS
103
In thousands of euros (Contd) Type: Deposit accounts Temporary transfer of assets Other accounts 261,121 510,458 771,579 Currency: Euro Foreign currency 768,220 3,359 771,579 986,986 3,144 990,130 563,013 20,808 406,309 990,130
2009
2008
Note 41 to the Annual Report includes details of term to maturity of these liabilities at the 2009 and 2008 year-ends, as well as their average interest rates for those years. As at 31 December 2009 and 2008, the Bank posted a balance of 406,033 and 264,593 thousand, respectively, recorded in the Financial liabilities at amortised cost Deposits from central banks, resulting from the discount of notes and commercial paper.
18. Deposits from other creditors

The breakdown of the balance for this heading in the balance sheets, in accordance with the classification, geographical area, type and currency of the transactions, is as follows:
2009
Classification: Financial liabilities at amortised cost 2,925,644 2,925,644 By geographical area: Spain European Union (except Spain) United States of America and Puerto Rico Other OECD countries Latin America Rest of the world 2,826,375 25,937 8,521 19,027 44,667 1,117 2,925,644 Currency: Euro Foreign currency 2,873,246 52,398 2,925,644
2008
2,783,318 2,783,318
2,683,958 22,544 8,483 22,098 45,034 1,201 2,783,318
2,734,912 48,406 2,783,318
104
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
In thousands of euros (Contd) Type: On demand Current accounts Saving accounts Other demand funds Notice Fixed-term deposits Saving accounts - housing Temporary transfer of assets (Note 7) 2,103,743 2,583 32,794 2,925,644 Less: Valuation adjustments Accrued interest Transaction fees Other 19,892 (4,798) 973 2,941,711 23,680 (5,200) 4,417 2,806,215 1,914,031 2,631 201,079 2,783,318 495,758 282,711 8,055 417,114 243,334 5,129
2009
2008
The Fixed-term deposits balance as at 31 December 2009 and 2008 in the above breakdown includes the following mortgage bonds that the Bank issued, with the following main characteristics:
Issue Date
13 November 2003 25 February 2004 10 June 2004 29 November 2004 29 May 2005 16 November 2005 20 June 2005 30 November 2005 21 February 2007 23 September 2009
Thousands of euros 2009

60,000 60,000 90,000 40,000 40,000 30,000 105,000 100,000 300,000
2008
60,000 60,000 60,000 90,000 40,000 40,000 30,000 105,000 100,000
Annual interest rate (%)

4.510% 4.385% 4.125% 3.875% 3.875% 3.500% 3.510% 4.510% 3.125%
Maturity date
26 November 2013 3 March 2016 16 June, 2009 29 November 2019 21 May, 2025 21 May, 2025 20 June, 2017 2 December 2015 21 February 2022 23 September 2013
825,000
585,000
These mortgage bonds were issued in accordance with Law 2/1981, 25 March, on the Regulation of the Mortgage Market and applicable provisions. For all of them there is the option of early redemption for the issuer provided that the requirement of complying with the limits on the volume of circulating mortgage bonds established in legislation regulating the mortgage market is met, or (in the case of the bond issued made on 21 February 2007) if changes are made to tax regulations that establish taxes that affect the holders significantly. The bonds issued by the Bank were agreed by the latters Board of Directors by virtue of the approvals made at the Banks General Shareholders Meeting and in accordance with the limits established by said Entity.
ANNUAL ACCOUNTS
105
As at 31 December 2008, the limit that the Bank of Spain assigned to the Bank for the system of loans with debt securities and loan transactions was 426,142 thousand (73,252 thousand as at 31 December 2008), of which 405,000 thousand were drawn as at that date (66,946 thousand as at 31 December 2008). The portfolio amount of available and undiscounted eligible assets was 6,714 thousand (29,399 thousand as at 31 December 2008). On 23 September 2009, the bank issued a one-off mortgage-backed security, with the following characteristics:
Issue Date
23 September 2009
Nominal amount in thousands of euros

300,000
Interest rate
3.125%
Maturity date
23 September 2013
Settlement
Annual
This security was registered in an Asset Securitisation Fund, which included one-off bearer mortgage-backed securities issued by 6 issuers with a total nominal amount of 1,950,000 thousand, out of which the Bank purchased bonds worth 300,000 thousand. These bonds are posted under Held-to-maturity investments - Debt securities on the balance sheet as at 31 December 2009 (see Note 7) and are discounted to secure the credit policy held in Bank of Spain (see Note 25.2). On 16 June 2009 the following issue matured:
Issue Date
10 June 2004
Nominal amount in thousands of euros

60,000
Interest rate
3.634%
Maturity date
16 June 2009
Settlement
Annual
60,000
This mortgage-backed security was issued in accordance with Law 2/1981, 25 March, on the Regulation of the Mortgage Market and applicable provisions. There was the option of early redemption for the issuer provided that the requirement of complying with the limits on the volume of circulating mortgage bonds established in legislation regulating the mortgage market was met. The Banks Board of Directors agreed on the bond that the Bank issued by virtue of the approvals given at the Banks General Shareholders Meeting and in accordance with the limits established by said Entity. Information required under Law 2/1981, 25 March, on the Regulation of the Mortgage Market and by Royal Decree 716/2009, 24 April These mortgage-backed securities are securities with the capital and interest secured by a mortgage, without needing to be registered, notwithstanding the Banks net worth liability, and, where applicable, by the replacement assets and economic flows generated by the derivative instruments included in each issue.
106
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
Mortgage-based securities include the owners right of credit with the Bank, secured in the way mentioned above, and the right to demand payment from the issuer upon maturity. The owners of these securities are creditors with special preferential treatment, in accordance with number 3 of article 1.923 of the Civil Code, over any other creditors in relation to all of the loans and mortgage loans registered in the issuers favour, and, where applicable, in relation to the replacement assets and economic flows generated by the derivative financial instruments included in the issues. In the event of bankruptcy proceedings, the security owners would be granted the special privilege established in number 1, section 1, of article 90 of the Bankruptcy Law 22/2003, 9 July. Notwithstanding the foregoing, in accordance with the provisions of number 7, section 2 of article 84 of the Bankruptcy Law, during the proceedings the necessary payments due to capital redemption and interest on the issued securities pending repayment on the bankruptcy proceedings application date would be met, up to the amount of the income that the insolvent party receives from the loans and mortgage loans and, where applicable, from the replacement assets that back the securities and from the economic flows generated by the instruments included in the issues. If due to a time lag the income that the insolvent party receives is not enough the meet the payments mentioned above, the Bankruptcy Administration must meet them by liquidating the replacement assets included in the issue and, if this is insufficient, it must undertake financing transactions to fulfil the security or bond holders payment requirements, the financer being substituted in their position. If it is necessary to proceed in accordance with number 3 of article 155 of the Bankruptcy Law, payment to all of the holders of securities issued by the issuer would be made on a pro rata basis, regardless of the issue date of the securities. The Board of Directors members state that the Bank has the express policies and procedures that cover all of the activities undertaken regarding the mortgage issues that it makes and that they guarantee strict fulfilment with mortgage regulations applicable to those activities. The following table shows the nominal value of all of the loans and mortgage loans and those that are eligible in accordance with applicable legislation for the purposes of calculating the limit on issuing mortgage securities:
2009
Nominal value of the Banks loans and mortgage loans pending repayment Nominal value of outstanding loans and mortgage loans that are eligible in accordance with article 3, Royal Decree 716/2009, 24 April, for the purposes of being used to calculate the limit on issuing mortgage securities 1,841,990 1,279,409
2008
1,762,486 1,509,415
ANNUAL ACCOUNTS
107
Information on the credit rating of the loans and mortgage loans relating to the Banks mortgage securities issues as at 31 December 2009 and 2008 is given below: a) mount receivable (capital and accrued interest) on eligible loans and mortgage A loans divided by the last fair value of the guarantees relating to the loans and mortgage loans (LTV).
2009
Transactions with LTV less than 50% Transactions with LTV between 50% and 80% Transactions with LTV between 80% and 100% 556,195 725,843 151
2008
564,073 938,817 11,452
Total
1,282,189
1,514,342
b) mount receivable (capital and accrued interest) on eligible loans and mortgage A loans in accordance with their classification in the tiers established in Appendix IX of Bank of Spain Circular 4/2004:
2009
Transactions classified as normal risk Transactions classified as non-performing assets due to default Transactions classified as non-performing assets due to reasons other than default Written-off risks 1,282,189
2008
1,514,342
Total
1,282,189
1,514,342
Note 41 includes details of term to maturity of these liabilities at the 2009 and 2008 year-ends, as well as their average interest rates for those years.
19. Subordinated liabilities

a) Breakdown The breakdown of the balance for this heading of the balance sheets, in accordance with their rating and type, is as follows:
2009
Classification: Financial liabilities at amortised cost 201,000 201,000 Type: Subordinated liabilities 201,000 201,000 Plus: Valuation adjustments Accrued interest Transaction fees 522 (91) 201,431
2008
177,000 177,000
177,000 177,000
1,770 (214) 178,556
108
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
The breakdown of subordinated liabilities forming the balance of this heading in the balance sheet as at 31 December 2009 and 2008 is as follows: FY09
Issue Date
First issue of subordinated bonds, Banco Gallego Second issue of subordinated bonds, Banco Gallego Third issue of subordinated bonds, Banco Gallego 2006 Fourth issue of subordinated obligations, Banco Gallego 2006 First issue of special subordinated obligations, Banco Gallego 2006 Fifth issue of subordinated obligations, Banco Gallego 2009 Gallego Preferentes, S.A. Preferential shares Gallego Preferentes 2006 (series 1 and 2) 52,000 52,000 3.647% Undetermined (2) In thousands of euros
Nominal value
18,000 18,000 30,000 10,250 22,750 50,000
Redemption value
18,000 18,000 30,000 10,250 22,750 50,000
Interest rate (1)

3.890% 4.298% 2.110% 2.278% 3.078% 6.000%
Maturity date
30/06/13 (1) 30/10/13 (1) 21/04/16 (1) 30/10/16 (1) Undetermined (1) 29/12/19 (1)
201,000
201,000
(1) 1st issued bonds: Twelve-month Euribor. If the resulting interest rate is lower than 3%, this will be used. 2nd issue bonds: Twelve-month Euribor. If the resulting interest rate is lower than 2%, this will be used. 3rd issue bonds: Three-month Euribor, plus a 0.50% differential. From 21st April 2011 onwards, it will increase by 0.50%. The Bank reserves the right to redeem from the 5th year onwards. 4th issue of obligations: Three-month Euribor, plus a 0.65% differential. From 30th October 2011 onwards, it will increase by 0.50%. The Bank reserves the right to redeem from the 5th year onwards. 1st issue of special subordinated obligations: Three-month Euribor, plus a 1.45% differential. From 30th October 2016 onwards, the interest rate will increase by 1.50%. The Bank reserves the right to redeem from the 10th year onwards. 5th issue of obligations: 6% annual fixed nominal rate. From 29 December 2012 onwards, 3-month Euribor plus a 4.9% differential, with a minimum annual nominal rate of 5.4%. The Bank reserves the right to redeem from the 5th year onwards. Preferential Shares (series 1): Three-month Euribor, plus a 1.85% differential. From 30 October 2011 onwards, the spread will be 2.85%. The Bank reserves the right to redeem from the 5th year onwards. Preferential Shares (series 2): Three-month Euribor, plus a 2.25% differential. The Bank reserves the right to redeem from the 5th year onwards. (2) Includes a deposit made on the company Gallego Preferentes, fully owned by Banco Gallego, to issue subordinated liabilities for the same amount.
FY08
Issue Date
First issue of subordinated bonds, Banco Gallego Second issue of subordinated bonds, Banco Gallego Third issue of subordinated bonds, Banco Gallego 2006 Fourth issue of subordinated obligations, Banco Gallego 2006 First issue of special subordinated obligations, Banco Gallego 2006 Gallego Preferentes, S.A. Preferential shares Gallego Preferentes 2006 (series 1 and 2)
Nominal value
18,000 18,000 30,000 10,250 48,750
Redemption value
18,000 18,000 30,000 10,250 48,750
Average rate (1)

4.649% 4.650% 5.586% 5.403% 6.203%
Maturity date
30/06/13 (1) 30/10/13 (1) 21/04/16 (1) 30/10/16 (1) Undetermined (1)
52,000
52,000
7.101%
Undetermined (2)
177,000
177,000
(1) 1st issued bonds: Twelve-month Euribor. If the resulting interest rate is lower than 3%, this will be used. 2nd issue bonds: Twelve-month Euribor. If the resulting interest rate is lower than 2%, this will be used. 3rd issue bonds: Three-month Euribor, plus a 0.50% differential. From 21st April 2011 onwards, it will increase by 0.50%. The Bank reserves the right to redeem from the 5th year onwards. 4th issue of obligations: Three-month Euribor, plus a 0.65% differential. From 30th October 2011 onwards, it will increase by 0.50%. The Bank reserves the right to redeem from the 5th year onwards. 1st issue of special subordinated obligations: Three-month Euribor, plus a 1.45% differential. From 30th October 2016 onwards, the interest rate will increase by 1.50%. The Bank reserves the right to redeem from the 10th year onwards. Preferential Shares (series 1): Three-month Euribor, plus a 1.85% differential. From 30 October 2011 onwards, the spread will be 2.85%. The Bank reserves the right to redeem from the 5th year onwards. Preferential Shares (series 2): Three-month Euribor, plus a 2.25% differential. The Bank reserves the right to redeem from the 5th year onwards. (2) Includes a deposit made on the company Gallego Preferentes, fully owned by Banco Gallego, to issue subordinated liabilities for the same amount.
ANNUAL ACCOUNTS
109
The bonds, obligations and preferential shares issued by the Bank were agreed by the latters Board of Directors by virtue of the approvals made at the General Shareholders Meeting and in accordance with the limits established by said Entity. The main characteristics of the bonds, obligations and shares that the Bank issued are: First issue of subordinated bonds, Banco Gallego 2003 On 30 June 2003, the Bank issued subordinated bonds amounting to 18,000 thousand consisting of 30,000 bearer bonds, at 60 thousand nominal euros each. These bonds are listed on the Association of Securities Dealers (AIAF in Spanish) market. The bonds were issued at par value. Second issue of subordinated bonds, Banco Gallego 2003 On 30 October 2003, the Bank issued subordinated bonds amounting to 18,000 thousand consisting of 30,000 bearer bonds, at 60 thousand nominal euros each. These bonds are listed on the Association of Securities Dealers (AIAF in Spanish) market. The bonds were issued at par value. Third issue of subordinated bonds, Banco Gallego 2006 On 21 April 2006, the Bank issued subordinated bonds amounting to 30,000 thousand consisting of 600 bearer bonds, at 50 thousand nominal euros each. These bonds are listed on the Association of Securities Dealers (AIAF in Spanish) market. These bonds were issued at par value (99.91% of the nominal value) and were targeted at qualified investors. Fourth issue of subordinated obligations, Banco Gallego 2006 On 30 October 2006, the Bank issued subordinated bonds amounting to 10,250 thousand consisting of 205 bearer bonds, at 50 thousand nominal euros each, issued at par value and targeted at qualified investors. These bonds are listed on the Association of Securities Dealers (AIAF in Spanish) market. Fifth issue of subordinated obligations, Banco Gallego 2009 On 29 December 2009, the Bank issued subordinated bonds amounting to 50,000 thousand consisting of 500,000 bearer bonds, with a nominal value of 100 thousand euros each, issued at par value and targeted at qualified investors. These bonds are listed on the Association of Securities Dealers (AIAF in Spanish) market. First issue of special subordinated obligations, Banco Gallego 2006 On 30 October 2006, the Bank issued special subordinated bonds amounting to 48,750 thousand consisting of 975 bearer bonds, at 50 thousand nominal euros each, issued at par value and targeted at qualified investors. These bonds are listed on the Association of Securities Dealers (AIAF in Spanish) market.
110
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
Issue of preferential shares, Gallego Preferentes 2006 (Series 1 and 2) On 30 October 2006, Gallego Preferentes, S.A. Unipersonal, a company that the Bank fully controls (see Note 12), issued preferential shares split into two series: series 1 amounting to 30,000 thousand consisting of 600 shares, 50 thousand euros nominal value each, and series 2 amounting to 22,000 thousand consisting of 440 shares, 50 thousand euros nominal value each. Both series were issued at par value. These bonds are listed on the Association of Securities Dealers (AIAF in Spanish) market. The Bank acts as the guarantor for the issue. b) Activity The activity in this heading of the balance sheet during FY09 and FY08 was as follows:
2009
Initial balance Emissions Fifth issue of subordinated obligations, Banco Gallego 2009 Early redemption First issue of special subordinated obligations, Banco Gallego 2006 (26,000) 50,000 177,000
2008
177,000
Final balance
201,000
177,000
On 23 April 2009, the Bank made a partial early redemption of the first issue of Banco Gallego 2006 special subordinated bonds, amounting to 26,000 thousand, subject to authorisation from Bank of Spain. This partial redemption generates a profit of 8,702 thousand, which is posted under Gains/losses on financial assets and liabilities - Financial instruments not accounted for at fair value through profit and loss in the statement of income (see Note 31). The Banks Directors feel that the Bank of Spains conditions to undertake the aforementioned partial redemption of the bonds have been met. c) Other information For the purposes of loan priority, the bonds are classified for their ranking and payment underneath all the unsecured creditors, being able to apply the outstanding amounts to the offsetting of losses in the same proportion as the equity is, in accordance with Bank of Spain regulations. The fifth issue of Banco Gallego 2009 subordinated bonds is below the Banks privileged and common creditors, in accordance with Royal Decree 216/2008, 15 February. The rights and credits that the holders of the securities in the First issue of special subordinated obligations, Banco Gallego 2006 hold with the Bank will be ranked underneath the other subordinated debts not considered to be special subordinated debt, and above any type of resources similar to the equity, preferential shares and preferential investments issued by the Bank or any of its subsidiaries, except where applicable legislation establishes otherwise.
ANNUAL ACCOUNTS
111
For the purposes of loan priority, the Banks obligations in relation to the issue of preferential shares, Gallego Preferentes 2006 (series 1 and 2) are ranked above ordinary shares and below the Banks unsecured and subordinated creditors (ex luding c those that have guarantees ranking the same as those in the issue). Their remuneration depends on the obtaining of sufficient unrestricted profit and on limits imposed by Spanish baking legislation regarding own equity, without any political rights. None of the bonds can be converted into Bank shares, and neither can privileges or rights be granted that, due to any contingency, make them convertible into shares. These issues fulfil the requirements to be calculated as equity, with the limits established in legislation in force. d) Financial costs The financial costs accrued by these bonds totalled 5,875 thousand in FY09 (11,066 thousand in FY08), which are recorded under the Interests and Similar Charges heading of the statement of income (see Note 27).
20. Provisions
The breakdown of the balance for this heading of the balance sheets is as follows:
2009
Provisions for financial guarantees (Note 25) Pension funds and similar obligations (Note 2.12.2) 5,423 1,883
2008
3,799
7,306
3,799
A continuacin, se muestran los movimientos que se han producido en dichas provisiones durante los ejercicios 2009 y 2008:
2009
Balance at start of the year Provisions for financial guarantees Pension funds and similar obligations (Note 2.12.2) Other 3,799 1,624 1,883
2008
3,518 510
(229)
7,306
3,799
112
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
21. Other financial liabilities

The breakdown of the balance for this heading of the balance sheets is as follows:
2009
Bonds payable Deposits received Proceeds account Special accounts Financial guarantees Other items 1,340 13 11,871 13,306 713 6,239
2008
2,325 13 12,190 19,499 812 4,713
33,482
39,552
In Note 41 of the Annual Report, there is a breakdown of the due dates for these liabilities at the end of FY09 and FY08.
22. Valuation adjustments

The balance for this heading of the balance sheets contains the net variations in the fair value of the financial assets classified as available for sale. The statement of income and expenditure for FY08 and FY09, which is an integral part of the statement of changes in net equity, includes the activity in this section of the balance sheet for those years. Furthermore, the breakdown of this heading of the balance sheets as at 31 December 2009 and 2008, making a distinction between debt securities and equity instruments, is as follows:
2009
Debt securities valuation adjustment Other equity instruments valuation adjustment (15,559) (7,884)
2008
(30,950) (10,139)
(23,443)
(41,089)
23. Equity
The Equity heading of the balance sheets includes the net equity amounts that refer to contributions from shareholders, accrued results consolidated through the statement of income and other equity instruments that are permanent net equity. a) Share capital As at 31 December 2009 and 2008, the Banks share capital was divided into 19,807,328 shares, with a 6.01 nominal value each, all of them with the same political and economic rights.
ANNUAL ACCOUNTS
113
Banco Gallegos General Shareholders Meeting held on 19 May 2009 adopted the resolution to delegate the Banks Board of Directors the power to increase the share capital on one or several occasions and within a maximum of 5 years from when the resolution is adopted, up to a limit of 59,521 thousand. At the meeting on 24 November 2008, in accordance with article 153.1b) of the Spanish Companies Law and the authorisation granted at the Banks General Shareholders Meeting, held on 11 April 2008, the Banks Board of Directors adopted the resolution to increase the share capital by 35,602 thousand (5,923,880 shares with a nominal value of 6.01 per share) and with a share premium of 5.99 per share, with a total amount of the increase of 71,086 thousand. As at 31 December 2009, the only shareholders who had a shareholding in the Banks share capital over 10% were La Caixa de Ahorros de Vigo, Ourense e Pontevedra Caixanova, which owns 49.84% of the share capital; Mr. Javier Ungra Lpez, who owns 10.50% of the share capital and Mr. Epifanio Campo Fernndez, who owns 10.10% of the share capital. As at 31 December 2009, the Bank owned 66,119 treasury shares, with a nominal value of 6.01 and an acquisition cost of 1,142 thousand. They are recorded under the Treasury shares heading in the attached balance sheet as at the aforementioned date (71,061 treasury shares and acquisition cost of 1,201 thousand as at 31 December 2008). In addition, the General Meeting on 19 May 2009 authorised the Board of Directors to issue bonds and similar securities that recognise or create a debt (ordinary or mortgage, debentures, shares, certified bonds, promissory notes, in euros or foreign currency, subordinated or not, fixed- or variable-rate, temporarily or with an indefinite duration, secured or not, single or in series) that cannot be converted into or exchanged for shares, including preferential shares, directly or through companies specifically set up for this purpose, within the legal period of five years and up to a nominal amount of 1,200 million euros. b) Share premium The Revised Text of the Companies Law expressly allows use of the share premium balance to increase capital and establishes no specific restrictions regarding the availability thereof. c) Legal reserve In accordance with the Revised Text of the Companies Law, companies that earn profit during the financial year must allocate 10% of this to the legal reserve until this reaches at least 20% of the share capital. The legal reserve may be used to increase the share capital by the proportion of its balance that exceeds 10% of the increased share capital. Apart from this, and as long as it does not exceed 20% of the share capital, this reserve can only be used to offset losses and provided that there are no other sufficient reserves available for this purpose.
114
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
d) Non-distributable reserve of own shares In accordance with articles 75 and 79 of the Revised Text of the Companies Law, a non-distributable reserve has been set up equivalent to the book value of the Banks own shares as at 31 December 2009 (see section a of this Note). This reserve amounts to 1,142 thousand. The non-distributable reserve will become available when the circumstances that caused it to be set up no longer exist.
24. Tax situation

The reconciliation of income for FY09 and FY08 with the taxable income for Corporate Income Tax is as follows:
2009
Profit before tax for the year Permanent differences Income not taken into account for tax reasons Non-tax deductible expenses Other adjustments (net) Temporary differences Posting tax bases for EIGs (net) Recovery of provisions not taken into account for tax purposes (net) Pension commitments hedge adjustment (net) Other temporary differences (net) (11,056) (646) 2,916 (3,242) (1,127) 145 (27) 17,048
2008
15,149
186 (77)
(11,762) (13,183) (2,573)
Taxable income
4,011
(12,260)
During FY 1998, the Bank undertook a merger process which took place under the Special regime for mergers, spin-offs, asset contributions and exchange of securities. The provisions established by article 107 of Chapter VIII, Heading VIII of the aforementioned Corporate Tax Law 43/1995 in force relating to this regime appear in the consolidated annual report of the Banks annual accounts for the year ending as at 31 December 1998. In accordance with article 103.3 of this Law, and pursuant to the wording of article 89.3 of the Revised Text of the Corporate Income Tax Law approved by Royal Legislative Decree 4/2004, 5 March, in force since 12 March 2004, as a result of this merger process a deductible amount of the Corporate Income Tax base was revealed, amounting to 59,383 thousand, resulting from the calculations carried out on the merger differences (goodwill) for accounting and tax purposes. A twentieth of this amount can be deducted for tax purposes for the years starting from 1 January 2002 onward. As at 31 December 2009, once the provision for the tax relating to this year has been calculated, another 11,148 thousand (13,935 thousand in FY08) are left to be deducted, in relation to which the Bank has recorded a deferred tax asset, having considered its tax effect.
ANNUAL ACCOUNTS
115
In February 2008, the Bank was notified of the start of checks and investigations relating to Corporate Income Tax for FYs 2003 to 2006 and other taxes applied to its activity for FYs 2004 to 2006, inclusive. As a result of these actions, during FY09 several certificates were signed approving Income Tax, Non-Resident Tax and ValueAdded Tax, which in the last case represented 1,127 thousand in extraordinary special income for the Bank. The Bank also signed certificates rejecting Corporate Income Tax for the same years, amounting to approximately 981 thousand, the payment of which was subject to an appeal made to the Central Tax Court, once the aforementioned amount had been paid, which is recorded under Income tax in the 2009 statement of income, because the Banks Directors and tax advisors believe that the criteria applied at the time are reasonable and can be defended and that the proceedings will not affect the Banks net worth in any way. The recording of the effects of this last payment in the accounts, including the effect of filing an additional tax return for 2007, represented a greater accrued Corporate Income Tax expense amounting to 1,365 thousand. Once these checks have been completed, the Bank keeps the last three years of taxes to which its activity is subject open for inspection by the tax authorities. Due to the differences between the temporary accounting and tax imputation criteria for specific income and expenditure, deferred assets and liabilities have been revealed, relating to temporary deductible and taxable differences in the future, respectively. The activity in the balances for these deferred taxes during FY09 and FY08 is as follows: FY09
Deferred tax assets

Balances as at 1 January 2009 Reclassification of active tax credits Pension commitments (net) Recovery of funds not taken into account for tax purposes Deferred commission Circular 4/04 BE Depreciation of re-valued assets Revision of 2008 Corporate Income Tax assessment (net) Tax inspection certificates adjustment Recording tax credits with deductions pending (net) Valuation adjustments in equity Other (net) 43,446 3,390 875 (194) (128) (77) (228) (510) (7,561) (836)
Deferred tax liabilities

1,574 (27) 36
38,177
1,583
116
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
FY08
Deferred tax assets

Balances as at 1 January 2008 Pension commitments (net) Recovery of funds not taken into account for tax purposes Deferred commission Circular 4/04 BE Depreciation of re-valued assets Revision of 2007 Corporate Income Tax assessment (net) Valuation adjustments in equity Other (net) 37,234 435 (3,955) (87) 117 8,622 1,080
Deferred tax liabilities

1,566 (27) 35
43,446
1,574
Tax assets deferred mainly includes the tax effect of hedging the Banks pension commitments which are deducted in the Corporate Income Tax in accordance with tax legislation in force, and provisioning expenses that are not tax-deductible, as well as the tax effect of the valuation of fixed-income and equity securities that have an impact on the net equity. It also includes the tax credit relating to merger goodwill, and the tax credit relating to tax losses and deductions in the tax amount payable that must be applied in future years, in accordance with the temporary limits established in tax legislation in force. The Bank has entered these assets insofar as they will be offset with tax benefits in the future. Tax liabilities deferred mainly includes the tax effect of the valuation of property for own use at fair value, in accordance with Bank of Spain Circular 4/2004. The Bank has shareholdings in several Economic Interest Groups (EIGs) which, in accordance with tax legislation in force, assign their positive or negative tax bases, withholdings and discounts in the amount of tax payable to their partners depending on their number of shareholdings. The result of applying these assignments and discounts entailed a lower accrued Corporate Income Tax expense of 121 and 287 thousand in FY09 respectively. Likewise, the Bank posted 9 thousand as higher accrued tax resulting from withholdings abroad. In FY08, the Bank earned the right to make a series of deductions established under tax legislation in force in order to avoid internal double taxation and stimulate certain expenditure and investment. The overall amount of these deductions is 406 thousand, which were recorded as tax credit under the section mentioned above, and therefore generated a lower accrued tax expense for the year. Regardless of the income tax posted in the statement of income, in FY09 the Bank recorded some valuation adjustments in its net equity for the amount net of the tax effect. This effect has been posted as deferred tax asset (see Notes 7 and 8).
ANNUAL ACCOUNTS
117
In previous years, the Bank opted to apply the deduction tax incentive through reinvestment of extraordinary profit gained on the sale of tangible fixed assets. In FY06, the Bank had assumed a reinvestment commitment amounting to 21,000 thousand, approximately, partially realised in FY05 and FY06 through the purchase of property, furniture, fixtures and computer equipment relating to its activity. The amount of the investment commitments realised in those assets up to FY06 was 14,607 thousand. In FY07, the reinvestment commitment was fully realised through the purchase of miscellaneous capital items in accordance with the type and time limits established in tax legislation. In accordance with article 42, points 6.a) and 10 of the Revised Text of the Corporate Tax Law, approved by Royal Legislative Decree 4/2004, 5 March, the income included in this deduction over the past five years and the dates on which the respective reinvestment commitments realised is as follows:
FY
2003 2004 2005 2006 2007
Income included in deduction

752 57 11,585 5,072
Year of reinvestment
FY03 FY04 FYs 2005 - 2006 FY07
After calculating the Corporate Income Tax provision for FY09, the Bank has a series of deductions in the tax amount payable that are pending application from previous years, which could be applied in future years within the periods and limits required by law, in accordance with the following breakdown:
FY
2007 2007 2008 2008 2008 2008 2009 2009 2009
Amount
223 44 1,610 36 4 259 395 9 2
Deduction
R&D&i Training Double taxation Training Charity R&D&i Double taxation Training Charity
Total
2,582
The Bank posted almost all of these tax credits and the aforementioned ones, insofar as it deems it necessary to charge them to the profit generated in future years, within the legally-established periods. In compliance with article 135 of the Revised Text of the Corporate Tax Law, approved by Royal Legislative Decree 4/2004, 5 March, it is placed on record that the Bank has certain assets, specifically property for own use, that are entered in the Tangible assets chapter at their purchase cost, re-valued in accordance with legislation in force.
118
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
The revaluation adjustments made on 1st January 2004 were debited to the reserves, net of the tax effect. The amounts of the revaluation will be re-categorised in Other reserves insofar as the assets are removed from the balance sheet due to amortisation, impairment or provisioning, in proportion to the revaluation. During FY06, the Bank transferred 2,949 thousand from Equity- Revaluation Reserves chapter to the Equity Other Reserves. As at 31 December 2009, the Buildings heading of the above table includes 1,527 thousand due to a property revaluation undertaken as a result of the merger described in Note 1, and 5,696 thousand due to the property revaluation that the Bank undertook in FY05, in accordance with legislation in force. During 2009 the Bank participated in corporate restructuring processes under the special fiscal neutrality system established in Chapter VIII, Heading VII of the Revised Corporate Income Tax Law. In accordance with article 93 of the Revised Law, information required under tax regulations in force in relation to transactions undertaken is included. On 5 November 2009, a merger was signed, in which the Bank took over the companies Gest 21, S. L. Unipersonal and Galebn Energa, S.A. Unipersonal. As a result of the merger, the Bank received amortisable assets from the merged company Galebn Energa, S.A. Unipersonal acquired between FY07 and FY09, inclusive, which were included in the Banks books for the same amount as appeared in the transferring companys books. The rest of the assets that the Bank received due to the merger are not amortisable and were also recorded for the same amount as they appeared in the transferring companies. The transferring companies did not enjoy any tax benefits regarding which the Bank should fulfil any obligations or requirements. Due to different interpretations of some tax regulations applicable to the Banks activities, in the results from checking procedures underway or those that the tax authorities conduct in the future for the years under inspection, there may be some contingent tax liabilities that might not be assessed objectively. However, in the opinion of the Banks Directors and its tax advisors, the tax payable that may result from possible actions that the Tax Authorities take in the future would not have a significant effect on these annual accounts.
ANNUAL ACCOUNTS
119
25. Other significant information

25.1. Financial guarantees These refer to amounts that the Bank must pay on behalf of third parties should the party originally obliged to make the payment does not do so as part of the obligations assumed by the latter during the normal course of their operations. The following is the breakdown as at 31 December 2009 and 2008, in accordance with the maximum risk that the Bank assumes as regards this:
2009
Financial guarantees Technical guarantees 49,242 189,078
2008
53,481 199,098
238,320
252,579
A considerable part of these amounts will expire without any payment obligations materialising for the Bank. Therefore, the overall balance of these obligations cannot be considered as a real future financing or liquidity need for the Bank to concede to third parties. Income received from guarantees is recorded under the Commission Received and Interests and Similar Charges headings (at the amount of the updated commission value) in the profit and loss account, and is calculated by applying the rate established in the contract from which it ensues to the nominal amount of the guarantee. The provisions recorded for the hedging of these granted guarantees, which have been calculated by applying similar criteria to those used when calculating the reduced value of financial assets valued at their amortised cost, have been recorded under the Provisions - Provisions for contingent risks and commitments heading of the balance sheets (see Note 20). 25.2. Assets transferred under guarantee As at 31 December 2009 and 2008, the assets that the Bank owned guaranteed transactions that it or third parties carried out, as well as various liabilities and contingent liabilities that the Bank assumed. The book value of the Banks financial assets submitted as a guarantee for these liabilities or contingent liabilities and similar liabilities amounts to 426,142 thousand (See Note 18). 25.3. Other contingent risks As at 31 December 2009 and 2008, the Banks contingent liabilities could be classified, in accordance with their type, as follows:
2009
Irrevocable documentary credits Other documentary credits Other items 4,787 78 2,497
2008
3,455 269 872
7,362
4,596
120
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
25.4. Drawable by third parties As at 31 December 2009 and 2008, the financial agreement limits awarded and the amounts available in these agreements for which the Bank had assumed a credit obligation exceeding the amount recorded in the assets side of the balance sheets as at those dates were as follows:
2009 Limit awarded

Drawable immediately Credit cards Public Administration Sector Other sectors 62,036 16,462 3,260,568 3,339,066 Drawable subject to conditions Other sectors 440,283 440,283 152,024 152,024 50,031 62 116,341 166,434
2008 Outstanding amount available Limit awarded Outstanding amount available

40,678 1,068 144,508 186,254
52,227 15,293 2,756,491 2,824,011
416,013 416,013
163,454 163,454
3,779,349
318,458
3,240,024
349,708
25.5. Third-party resources managed and marketed by the Bank and securities depositary The Bank does not manage third-party equity, and accordingly it did not have resources outside the balance sheet that the Bank managed as at 31 December 2009 and 2008. The following is a breakdown of the fair value of third-party resources deposited in the Bank as at 31 December 2009 and 2008:
2009
Investment fund portfolios Pension fund portfolios Third-party deposits 485,343 49,757 327,955
2008
363,067 39,284 275,020
863,055
677,371
ANNUAL ACCOUNTS
121
26. Interest and similar income

This includes the accrued interest during the year for all assets whose income, implicit or explicit, is obtained by applying the interest rate in force, regardless of whether they are valued at their fair value, as well as product adjustments resulting from hedge books. The following is a breakdown of the source of the most significant interest and similar income that the Bank accrued in FYs 2009 and 2008:
2009
Loans and advances to credit institutions Loans and advances to customers Debt securities Adjustment of income due to hedge books Other income 698 191,072 17,195 (631) 1,648
2008
3,563 212,675 13,170 (547) 2,444
209,982
231,305
The breakdown in accordance with the financial instruments that caused them is:
2009
Available-for-sale financial assets Loans and receivables Adjustment of income due to hedge books Other income 17,195 191,770 (631) 1,648
2008
13,170 216,238 (547) 2,444
209,982
231,305
27. Interests and similar charges

This covers the interest accrued during the year for all financial liabilities with income, implicit or explicit, including that from remuneration in kind, obtained by applying the interest rate in force, regardless of whether they are valued at their fair value, as well as adjustments of the cost as a result of hedge books and the cost due to interests attributed to pension funds set up.
122
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
The breakdown of this heading in the 2009 and 2008 statements of profit and loss was the following:
2009
Central Bank Deposits from credit institutions Deposits from other creditors Debt certificates including bonds Subordinate liabilities (Note 19) Adjustment of costs due to hedge books Other interest 2,977 12,431 80,239 5,875 (2,001) 7
2008
3,788 33,014 93,190 275 11,066 3,963
99,528
145,296
The breakdown of the amounts recorded under the Interests and similar charges heading of the statement of income, classified in accordance with the financial investment portfolio that originated them, is shown below:
2009
Financial liabilities at amortised cost Adjustment of costs due to hedge books 101,529 (2,001)
2008
141,333 3,963
99,528
145,296
28. Return on equity investments

This includes the dividends and remuneration from equity instruments relating to profit classified by investees subsequent to the date on which the share was purchased. The breakdown of this heading in the statements of income, by portfolio, type of financial instrument and type of companies that originated them, is as follows:
2009
Equity instruments classified as: Available-for-sale financial assets (Note 8) Holdings in Group and associate companies (Note 12) 1,048 767 1,815 Equity instruments in the form of: Shares 1,815 1,815 By company: Group companies and associated (Note 12) Other companies 767 1,048 1,815
2008
733 6,075 6,808
6,808 6,808
6,075 733 6,808
ANNUAL ACCOUNTS
123
29. Commissions received

The following table shows the amount of the income due to commissions that the Bank accrued during FY09 and FY08 classified in accordance with the main items that caused them:
2009
Commissions received Commissions for contingent risks Commissions for contingent commitments Commissions for collection and payment services Commissions for investment services and related activities Commissions for exchanging foreign currency and notes Commissions for marketing Other 3,490 549 11,921 965 36 3,435 1,547 21,943 Other operating income Arrangement fees (Note 32) 1,430
2008
4,176 889 15,295 1,415 34 5,170 1,298 28,277
2,028
30. Commissions paid

This includes the amount of all of the commissions accrued during the year, except those that are an integral part of the interest rate in force of the financial instruments. The following table shows the amount of income from commissions that the Groups accrued in FY09 and FY08, classified in accordance with the main items that caused them, and with mention of the sections of the statement of income under which this income has been posted:
2009
Commissions transferred to other companies For collection or refund of bills For company risk Commissions transferred to financial institutions by Visa Other transferred commissions 61 87 749 211 1,108 Other paid commissions Commissions paid for treasury operations Commissions paid to financial brokers Other paid commissions 140 135 115 390
2008
97 140 971 202 1,410
162 281 181 624
1,498
2,034
124
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
31. Gains or losses on financial assets and liabilities

This heading includes the valuation adjustments of financial instruments, with the exception of those attributed to interest accrued by applying the interest rate in force method and of corrections to asset values, as well as the profit/loss resulting from buying and selling them. The breakdown of the balance in this heading, in accordance with the source of the items that constitute it and their classification, is as follows:
2009
Source: Fixed-income and variable-income portfolio Financial derivatives 9,383 770 10,153 Portfolio: Trading portfolio Other financial instruments at fair value through profit and loss Financial instruments not valued at fair value through profit and loss (Notes 7, 8, 10 and 19) Other 1,576 1 8,576 10,153
2008
488 6,753 7,241
7,491 (638) 488 (100) 7,241
32. Other operating income

The breakdown of this heading in the statements of income is as follows:
2009
Income from operating lease contracts Arrangement fees (Note 29) Other 1,559 1,430 1,093
2008
2,028 350
4,082
2,378
33. Personnel costs

This heading contains all the remuneration for staff included on the payroll, either permanent or temporary, regardless of their duty or activity, accrued during the year for any reason, including services for pension schemes, remuneration based on own equity instruments and expenses included at the value of the assets.
ANNUAL ACCOUNTS
125
The breakdown of the Personnel costs heading of the consolidated statements of profit and loss is the following:
2009
Wages and salaries Social Security External pension funds (Note 2.12.1) Defined contribution plans (Note 2.12.1) Early retirements during the year (Notes 2.12.2 and 20) Other personnel costs 43,243 9,801 3,006 161 1,883 1,690
2008
43,878 9,825 2,447 161 3,574
59,784
59,885
The Other personnel costs heading includes 1,605 thousand for premiums paid to insurance companies to hedge death and disability contingencies (788 thousand in FY08) (see Note 2.12.2.2). The functional distribution of the average number of the Banks employees in FYs 2009 and 2008 and as at 31 December 2009 by gender and job tier is as follows:

Senior Management Executives and officers Other administration and sales staff Assistant staff
Average number of employees 2009 Female

202 95
2008 Total
8 756 207 1
Number of employees on 31-12-2009 Total

2 765 242 1
Male
8 554 112 1
Female
195 115
Male
2 570 127 1
Female
202 90
Male
8 539 106 1
297
675
972
310
700
1,010
292
654
The pension obligations with staff are mentioned in Note 2.12.
34. Other general administration costs

2009
Technology and IT Communication Advertising Buildings and facilities Tributos Rent Legal and technical report fees Business and travelling expenses Other administration costs 2,617 3,071 1,719 3,018 4,594 9,427 1,115 1,483 3,957
2008
2,841 3,504 2,153 3,213 4,844 9,200 1,299 1,839 3,525
31,001
32,418
126
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
Other information The balance for Legal and technical report fees above includes the fees that the Bank paid for the audit of its financial statement and other audits. In FY09 and FY08, these expenses totalled 109 and 98 thousand.
35. Other operating costs

The balance for this heading of the statement of income refers entirely to the annual payment into the Deposit Guarantee Fund (see Note 1.8).
36. Gains/losses due to write-off of assets not classified as non-current held for sale
Gains/losses 2009
On sale of tangible assets (Note 13) On disposal of equity investments (Note 12) Other items 293 17,940 621
2008
464 450
18,854
914
37. Related parties

As well as the information provided in Note 2.12.2 and Note 4 of the Annual Report relating to balances and transactions undertaken with the members of the Banks Board of Directors and Senior Management, the following table shows the balances recorded in the balance sheets as at 31 December 2009 and 2008 and the transactions undertaken in the statement of income for FY09 and FY08 caused by transactions undertaken with related parties:
ANNUAL ACCOUNTS
127
2009 Associates
Assets: Loans and advances to customers Liabilities: Deposits from other creditors Losses and gains: Depreciable Interests and similar charges Income Interests and similar income Commissions received Return on equity investments Others: Contingent liabilities 8,113 139 10,712 7,645 11,423 745 3,468 68 2,388 368 11,857 2,179 93 2,003 4,628 202 9,641 61,234 16 95,842 11,603 218,817 112,879 62,580 229,916
2008 Other related parties Associates Group companies Multigroup Other related parties
52,814
Group companies
Multigroup
86,168
61,729
19
95,240
3,768
8,222
4,411 1,205 6,075
4,356 417
4,349
10,273
2009 Associates
Assets: Unsecured loans Mortgages Credits Other items 54,487 107,284 53,467 3,579 218,817 Liabilities: Saving accounts Fixed-term deposits Creditor credit accounts Current accounts 1,100 8,541 9,641 54,035 7,199 61,234 16 16 10 90,515 14 5,303 95,842 5,909 5,694 11,603 15,269 26,585 71,025 112,879 7,798 6,149 48,301 332 62,580 57,364 102,333 66,486 3,733 229,916
9,491 5,448 36,820 1,055 52,814
Group companies
Multigroup
2,241 25,651 58,276 86,168
52,420 9,309 61,729
19 19
62 91,020 278 3,880 95,240
128
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
The breakdown of balances by loan terms in FY09 and FY08 is as follows:

2009 Associates
Assets: Up to 1 year Between 1 and 5 years Between 5 and 10 years More than 10 years 94,270 46,831 1,958 75,758 218,817 Liabilities: On demand Less than 3 months Between 3 months and 6 months Between 3 months and 9 months Between 9 months and 1 year More than 1 year 8,541 320 320 320 140 9,641 7,199 1,350 300 385 52,000 61,234 16 16 5,327 60,515 30,000 95,842 5,694 3,680 330 574 1,325 11,603 71,025 15,269 26,585 112,879 47,288 2,761 4,756 7,775 62,580 84,297 66,498 1,981 77,140 229,916
36,696 3,690 8,389 4,039 52,814
Group companies
Multigroup
58,276 2,241 25,651 86,168
9,309 420 52,000 61,729
19 19
4,220 1,020 90,000 95,240
The policies that the Banks follows to award loans, deposits, acceptance bills and similar transactions to the members of the Banks Board of Directors and Senior Management mainly consist of the Executive Committee analysing the transactions. Subsequently, should the assessment of the transaction be positive the Executive Committee proposes the transaction to the Board of Directors for possible approval thereof.
38. Information by business segment

38.1. Segmentation criteria The information by segment is organised firstly in accordance with the Banks lines of business (primary segment) and then with geographical distribution (secondary segment). The lines of business described below have been established in accordance with the Banks organisational structure in force, on the one hand bearing in mind the nature of the products and services on offer and on the other the customer segments at which they are targeted.
ANNUAL ACCOUNTS
129
During FY09 and FY08, the Bank focussed its activities on the following lines of business: Retail Banking Wholesale Banking Corporate Unit Non-financial subsidiaries The income and expenditure that cannot be attributed to a specific operating line or which are the result of decisions that affect the Bank - including costs incurred by projects and activities that affect several lines of business, as well as the profitability of equity and other resources, assets and liabilities that cannot be assigned to each line of business are allocated to a Corporate Unit. The reconciliation items resulting from a comparison of the result of integrating the financial statements of the various lines of business (formulated with management criteria) with the Banks consolidated financial statements are also assigned to this unit. 38.2. Standards and methods used to draft the information by business segment The information by segment described below is based on the monthly reports written from information provided by management control software. The information is structured as though each line of business were an independent business. Therefore, the net return on interests and ordinary income for the lines of business is calculated by applying transfer prices in keeping with the market rates in force to the relevant assets and liabilities. The return on the variable annuity portfolio is distributed among the lines of business in accordance with their share. The administration costs include both direct and indirect costs and are distributed among the lines of business and service units in accordance with the internal use of these services. The assets distributed among the various business segments include assets held for trading and financial instruments and loans on financial institutions and on creditors, excluding their provision for bad debts. The liabilities distributed among the different business segments include debt certificates including bonds, and debts owned to financial institutions and to creditors. The other assets, liabilities and equity are allocated to the Corporate Unit. 38.3. Information by business segment The following tables show the information by business segment (primary segment):
130
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
Retail Banking 2009

Interest income Return on equity investments Commissions received Commissions paid Other operating income Other operating costs Gains or losses on financial assets and liabilities Exchange rate differences Gross income Administration costs Impairment losses Depreciations Provisioning expenses Operating income Gains/losses due to write-off of assets not classified as non-current held for sale Gains/losses due to write-off of assets not classified as interrupted transactions Profit/loss before tax 80,801 20,815 (1,005) 1,680 (1) 102,290 (47,355) (25,176) (5,409) 68 24,418 (774) 101,002 (47,705) (8,627) (3,479) 41,191 (650) 26,527 (1,410) 2,249
Wholesale Banking 2009

(1,377) 1,815 10,154 10,592 10,592 17,940
Corporate Unit 2009

18,634 881 (493) 2,402 (992) 371 20,803 (43,430) (16,513) (8,405) (1,692) (49,237) 1,688
Non-financial subsidiaries 2009

12,396 247 12,643 12,643 5,444 5,444
Total 2009
110,454 1,815 21,943 (1,498) 4,082 (992) 10,153 371 146,328 (90,785) (41,689) (13,814) (1,624) (1,584) 18,854 14,235 914
2008
73,636
2008
(1,932) 6,808 7,241 12,117 (780) 11,337
2008
9,276 1,335 (624) 129 (1,346) 289 9,059 (44,598) (8,198) (43,737) 1,564
2008
5,029 415
2008
86,009 6,808 28,277 (2,034) 2,378 (1,346) 7,241 289 127,622 (92,303) (9,407) (11,677)
(222) 23,422
40,541
28,532
11,337
(47,549)
(42,173)
12,643
5,444
(222) 17,048
15,149
Retail Banking
Total Assets Total Liabilities
Wholesale Banking 2009

498 969
Corporate Unit 2009

1,362 1,064
Non-financial subsidiaries 2009

386 33
Total 2009
4,223 4,223
2009
1,977 2,157
2008
1,649 2,054
2008
488 542
2008
1,729 1,608
2008
360 22
2008
4,266 4,266
Pool of funds
(180)
(405)
(471)
(54)
298
121
353
338
39. Cash flow risk regarding financial instruments

Cash flow risk is the risk that the company will not be able to fulfil the obligations related to its financial liabilities. Cash flow risk is therefore the risk that the companys available cash will not be sufficient to meet its financial obligations with third parties on the due date. The Banks Board of Directors approves cash flow risk management goals and related policies at a strategic level. The Management Committee is responsible for implementing, enforcing and tracking them.
ANNUAL ACCOUNTS
131
The Banks main objective in relation to cash flow risk consists of having the necessary systems and processes at all times to allow the Bank to meet its payment obligations on time. It must therefore use methods to keep up sufficient cash flow levels to meet is payments without significantly compromising the Banks results and instruments that allow it to meet its payment obligations in any circumstances. The balance sheet analysis in accordance with due dates plays a vital role in the Banks cash flow risk management. By using IT tools, this analysis includes future cash flow and financing needs based on the Banks future development and growth expectations. The analysis is performed on different scenarios to find out the Banks financing needs in different situations of growth, arrears, etc. and to find out and project future payments and collections that need be made in the short- and mediumterm. The expected due dates for the various financial assets and liabilities are considered for the purposes of these analyses. Sometimes, these expected due dates are different from the contractual due dates for the financial assets and liabilities. They are determined based on the Banks and Groups past experience that shows that there are certain financial instruments, such as current accounts, that perform differently, as far as their due date is concerned, to the contractual terms and conditions (in the case of customer current accounts, these are demand liabilities that traditionally record a much more stable and permanent performance in the balance sheet). The Banks Corporate Development and Finance Division manages the cash flow risk involved in the business activity and financial instruments to ensure that at all times there is sufficient cash flow to meet its payment obligations related to the repayment of its liabilities on their respective due dates, without affecting the Banks ability to quickly respond to strategic market opportunities. To manage the cash flow risk, the Bank uses a centralised approach, by applying integrated software tools to analyse the cash risk, based on cash flows that the Bank estimates for its assets and liabilities, as well as extra guarantees and instruments available to guarantee, should the need arise, extra cash sources. The Banks cash flow risk position is established based on different scenario and sensitivity analyses. These analyses not only take normal market situations into account, they consider extreme circumstances that could occur and affect the Banks collection and payment flow, due to market factors or the Banks internal factors. Regardless of the interbank market, including temporary transfers of securities in the wholesale market, the Bank has several alternative cash sources that can be used if needed, considering preventative and/or corrective actions regarding situations towards which it has a tendency or at which it has arrived and it wishes to amend, either by changing its targets or in accordance with the recommendations from the Assets and Liabilities Committee (COAP).
132
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
In light of the special circumstances that took hold in international financial markets, mainly in the second half of 2008, European governments undertook to adopt the necessary measures to attempt to solve bank funding problems and their impact on the real economy, in order to keep the international financial system. The main aims of those measures were to guarantee suitable cash flow conditions for financial instruments, provide access to funding for financial institutions, lay down systems to provide additional capital for banks to keep the economy running, make sure that accounting standards are flexible enough to take the special market conditions into account, and boost and improve coordination policies between European states. Under this general framework, during the last quarter of 2008, the following measures were passed in Spain: Royal Decree-Law 6/2008, 10 October, which sets up the Financial Assets Acquisition Fund (FAAF in Spanish), and Order EHA/3118/2008, 31 October, which enforces the aforementioned Royal Decree. The purpose of the FAAF, which is assigned to the Ministry of Finance and has an initial amount of thirty billion euros that can be increased to fifty billion euros, is to purchase, charged to the Treasury and with market criteria, through auction procedures, financial instruments that financial institutions issue and Spanish assets securitisation funds, backed by loans awarded to individuals, companies and non-financial Royal Decree-Law 7/2008, 13 October, on Emergency Economic Measures in relation to the Action Plan for Eurozone Countries and Order EHA//3364/2008, 21 November, which enforces article 1 of said Royal decree that contains the following measures: Firstly, the granting of State guarantees to notes, bonds and obligations that financial institutions residing in Spain from 14 October 2008 onwards issue, which must: be individual operations or part of issue programs; not be subordinated debt or debt secured by another type of guarantee; be allowed to enter trading on Spanish official secondary markets; have a maturity period of between 3 months and 3 years, although this period can be increased to 4 years subject to a report from the Bank of Spain; have a fixed or variable interest rate, with special requirements for variable rate issues; be depreciated in one single payment, and must not include options or other financial instruments and have a par value of no less than 10 million. As part of the risk management policies, the Banks Directors have the option of using the aforementioned measures, and in any case they believe that these measures provide a suitable scope of action so that transactions can be undertaken in FY10 without revealing any cash flow or profitability difficulties for the Bank. The Majority Shareholder has also stated his willingness to provide any financial backing required. The Bank has several general and traditional methods of capturing cash flow, including capturing customer deposits, the availability of various cash facilities with official organisations, capturing cash flow through the interbank market and issuing debt securities in wholesale and retail markets.
ANNUAL ACCOUNTS
133
It is worth noting that the credit crunch that is affecting international and domestic markets, which stemmed from the North American sub-prime crisis, has led to a sharp slowdown in financial markets and, consequently, a significant reduction in the various sources of attracting funds for international and national banks. The attraction of funds through the interbank market and by issuing debt securities has therefore been hit hard by the aforementioned credit crunch. In view of the new situation, during FY09 decisions were taken to adapt the Bank to the new environment in order to ensure that it has sufficient cash flow to meet all of its payment obligations on time and to achieve its strategic and operational investment and growth targets. These decisions include fostering fund attraction programs and campaigns through the network of branches in the form of paid fixed-term deposits, which during FY09 and FY08 allowed funds with fixed terms between 3 months and 2 years to be attracted, which totalled 527,798 and 293,012 thousand, and increasing available cash flow facilities with the Central European Bank by signing a credit policy with the Bank of Spain and using discountable eligible assets. The credit policy totalled 426,142 thousand on 31 December 2009 (see Note 18) (73,252 thousand on 31 December 2008), of which 21,142 thousand were available as at 31 December 2009 (6,306 thousand as at 31 December 2008). The portfolio amount of available and undiscounted eligible assets in the Bank of Spain policy was 6,714 thousand. Now that these measures have been adopted, the Banks Directors do not expect cash flow problems during FY10 and FY11, and they even think that there will be no need to use the cash flow backup systems for the Spanish financial system that the Spanish Government created. The following is a breakdown by due date of the balances for several headings of the balance sheets, in a normal market conditions scenario:
134
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
In thousands of euros (*)
On demand
Assets Cash and balances with central banks and financial institutions (Notes 5 and 6) Loans and advances to other debtors (Note 9) Fixed-income portfolio (Note 7) Variable-income portfolio (Note 8) Shares (Note 12) Trading derivatives (Note 10) Hedging derivatives (Note 10) Non-current assets held for sale (Note 11) Tangible assets (Note 13) Intangible assets (Note 14) Tax assets (Note 24) Other assets (Note 15) Total at 31 December 2009 Total at 31 December 2008 Liabilities Deposits from central banks (Note 17) Deposits from financial institutions (Note 17) Deposits from other creditors (Note 18) Subordinate liabilities (Note 19) Other financial liabilities (Note 21) Trading derivatives (Note 10) Hedging derivatives (Note 10) Provisions (Note 20) Other liabilities (Notes 16 and 24) Net equity (Notes 22 and 23) Total at 31 December 2009 Total at 31 December 2008 Assets-liabilities difference as at 31 December 2009 Assets-liabilities difference as at 31 December 2008 33,482 1,888 18,412 3,251 160,296 159,312 49,752 190,564 3,274 99,989 103,448 33,750 37,832 2,807 22,869 1,838 7,504 210,048 349,876
Up to 1 month
Between 1 and 5 years
More than 5 years
Total
25,772 88,525 114,297 422,836
3,161 286,587 2,963 292,711 319,508
570,381 3,746 2,728 576,855 457,499
824,319 334,189 16,339 39,073 8,584 1,222,504 573,434
1,579,228 127,399 24,523 67,147 8,923 1,807,220 2,143,169
132,381 3,382,790 468,297 37,832 24,523 2,807 22,869 1,838 67,147 16,339 39,073 27,739 4,223,635 4,266,322
122,215 236,119 366 358,700 1,618,489 (244,403) (1,195,653)
9,046 500,781 65 509,892 607,917 (217,181) (288,409)
406,033 141,779 729,312 7,306 3,905 1,288,335 776,434 (711,480) (318,935)
73,957 884,288 36,000 1,583 995,828 239,785 226,676 333,649
15,275 491,222 165,000 239,087 910,584 864,385 896,636 1,278,784
406,033 365,546 2,941,711 201,431 33,482 1,888 18,412 7,306 8,739 239,087 4,223,635 4,266,322
(*) The due dates in the above table for assets and liabilities with contractual due dates have been estimated by considering the contractual due dates. For assets and liabilities without a contractual due date or for those with evidence of a different date of execution to this, this is based on the best estimate of its date of execution. These gaps show a typical trade barrier structure with a high percentage of demand account financing.
This table does not show the Banks cash flow situation because demand accounts and other customer deposits are considered as any other payable liability when their stability is typical of commercial banking activities. In light of this effect, the differences between assets and liabilities at each of the terms fall within a reasonable scope for the managed turnovers. In this regard, the Management Report contains a long description of the Banks cash flow management.
ANNUAL ACCOUNTS
135
40. Fair value

40.1. Fair value of financial assets and liabilities The following is a breakdown of the fair value of the Banks financial assets and liabilities as at 31 December 2009 and 2008, including those which, in accordance with the criteria explained in Note 2, were not recorded in the balance sheets on these dates at their fair value, according to their classifications, along with their book values on those dates (in thousands of euros):
2009 Book value

Assets Cash and balances with central banks and financial institutions (Notes 5 and 6) Loans and receivables (Note 9) Fixed-income portfolio (Note 7) Variable-income portfolio (Note 8) Shares (Note 12) Trading derivatives (Note 10) Hedging derivatives (Note 10) Non-current assets held for sale (Note 11) Tangible assets (Notes 13 and 41.2) Intangible assets (Note 14) Tax assets (Note 24) Other assets (Note 15) Total assets Liabilities Deposits from financial institutions (Note 17) Deposits from other creditors (Note 18) Deposits from central banks (Note 17) Subordinate liabilities (Note 19) Debt certificates including bonds Other financial liabilities (Note 21) Trading derivatives (Note 10) Hedging derivatives (Note 10) Provisions (Note 20) Other liabilities (Notes 16 and 24) Total liabilities Net assets Valuation adjustments (Note 22) Equity (Note 23) Total net equity (23,443) 262,530 239,087 (23,443) 471,535 448,092 365,546 2,941,711 406,033 201,431 33,482 1,888 18,412 7,306 8,739 3,984,548 362,798 2,981,595 406,818 221,339 33,482 1,888 18,412 7,374 8,739 4,042,445 132,381 3,382,790 468,297 37,832 24,523 2,807 22,869 1,838 67,147 16,339 39,073 27,739 4,223,635 132,420 3,636,493 475,608 37,832 24,523 2,807 22,869 1,838 72,996 16,339 39,073 27,739 4,490,537
2008 Fair value Book value Fair value
266,579 3,380,266 421,497 28,480 28,185 1,825 30,503 523 39,505 16,657 46,943 5,359 4,266,322
266,389 3,632,765 426,201 28,480 28,185 1,825 30,503 523 41,293 16,657 46,943 5,359 4,525,123
725,537 2,806,215 264,593 178,556 39,552 2,683 26,746 3,799 8,246 4,055,927
727,303 2,788,523 265,237 193,811 39,552 2,683 26,746 3,799 8,246 4,055,900
(41,089) 251,484 210,395
(41,089) 510,312 469,223
Total shareholders net equity and liabilities
4,223,635
4,490,537
4,266,322
4,525,123
136
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
The criteria used to establish the fair value of the financial assets and liabilities are described below: As a general rule, the different financial assets and liabilities are assessed by updating the future cash flows discounted from the market interest rate curve, increased by the risk premium required to cover the expected debt. The fair value of the fixed-interest rate financial assets is calculated by discounting the future cash flows from the market interest rate curve until the due date. The fair value of the variable-rate financial assets is calculated by discounting the future cash flows until the next interest rate variation, upon which the remaining balance is updated. The fair value of the financial liabilities is calculated by discounting the future cash flows from the market interest rate curve. Short-term liabilities with low remuneration (euro savings accounts and current accounts), included under the deposits from other creditors heading, with balances of less than 12,000 euros, due to their constant evolution are considered not to be subject to interest rate variations, and so are likened to perpetual liabilities. For non-traded equity instruments for which it has been possible to estimate a fair value, generally accepted assessment methods have been considered, which use observable market data. The fair value of the financial assets and liabilities traded on secondary buoyant markets, their respective listings as at the date of the financial statements. For OTC derivatives not traded on organised buoyant markets and for non-traded debt securities, their fair value has been estimated by applying generally accepted assessment methods which use directly observable market data. As mentioned above, except mature loans and receivables and investments, equity instruments for which the market value cannot be estimated reliably and financial derivatives that have these instruments as the underlying asset and are settled by handing them over, the financial assets that the Bank owns are posted in the attached balance sheets at fair value. Likewise, except the financial liabilities included in the trading portfolio, liabilities included at fair value and financial derivatives that have equity instruments for which the market value cannot be estimated reliably as the underlying asset, the Banks financial liabilities are posted in the attached balance sheets at their amortised cost. Part of the assets and liabilities recorded under Loans and receivables and Financial liabilities at amortised cost in the balance sheet as at 31 December 2009 are included in the fair value hedges that the Bank manages, and therefore they are posted in this balance sheet at their fair value for the hedged risk (interest rate see Note 10).
ANNUAL ACCOUNTS
137
Most of the other assets and some liabilities are variable-rate, with an annual revision of the applicable interest rate. Their fair value as a result of changes in the market interest rate does not therefore differ significantly from the amounts at which they are posted in the attached balance sheet. Other assets and liabilities are fixed-rate. Out of these, a considerable number have a due date of under 1 year and so their market value as a result of changes in market interest rates does not differ much from that recorded in the attached balance sheet. Consequently, the fair value of the amount of assets and liabilities that are fixedterm, demand, with residual maturity of over one year and not hedged as a result of changes in the market interest rate do not differ significantly from that recorded in the attached balance sheet. 40.2. Fair value of tangible assets The following is a breakdown of the fair value of some of the Banks tangible assets as at 31 December 2009 and 2008, in accordance with the tiers under which they are classified, along with their book values on these dates:
2009 Book value

Tangible assets Tangible fixed assets for own use IT equipment and facilities Furniture, vehicles and other fixtures Buildings 67,147 1,610 36,875 28,662 72,996 1,610 36,875 34,511
2008 Fair value Book value Fair value
39,505 2,391 27,352 9,762
41,293 2,391 27,352 11,550
67,147
72,996
39,505
41,293
The fair value of the tangible fixed assets shown in the above table has been estimated as follows: Regarding assets for which there is no up-to-date valuation performed by a valuer authorised by the Bank of Spain, the fair value included in the above table has been taken from the Groups estimates considering mortgage market data in relation to price trends of similar tangible assets. Regarding assets for which there is an up-to-date valuation performed by a valuer authorised by the Bank of Spain, the fair value is the value taken from this valuation in accordance with the provisions of ECO/805/2003, 27 March 2003, regarding valuation standards applied in respect of assets and rights for specific financial purposes, published in the Official State Bulletin on 9 April 2003. In accordance with articles 4 and 19.2.a and b of the latter, the economic life is calculated, the maximum being the limits established in the aforesaid article bearing in mind that for buildings not used for a specific purpose the maximum economic life will be obtained by considering the terms established in the aforementioned article depending on the surface area used for each different purpose. The Valuation Company that performed these valuations, under its own responsibility, was Tcnicos en Tasacin, S.A., a company registered in the Register of Companies Specialising in Valuations of the Bank of Spain, under number 4315-20-12-85.
138
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
41. Remaining terms of transactions and average interest rates

The following table shows a breakdown, by due date, of the balances for some headings of the balance sheet as at 31 December 2009 and 2008, as well as their average annual interest rates for FY09 and FY08: FY09
On demand
Assets Cash and balances with central banks (Note 5) Loans and advances to other credit institutions (Note 6) Loans and advances to other debtors (Note 9) Debt securities (Note 7) 70,473 32,975 33,750 137,198 Liabilities Deposits from central banks (Note 17) Deposits from financial institutions (at amortised cost) (Note 17) Deposits from other creditors (at amortised cost) (Note 18) Subordinate liabilities (Note 19) Other financial liabilities (Note 21) 3,273 99,989 33,482 136,744
Up to 1 month
More than 5 years
Total
Average interest rate for FY 2009
33 25,739 88,525 114,297
3,161 286,587 2,965 292,713
570,381 3,746 574,127
824,319 334,189 1,158,508
1,579,228 127,397 1,706,625
70,506 61,875 3,382,790 468,297 3,983,468
0.73% 0.65% 4.60% 3.42%
122,215 236,119 366 358,700
9,046 500,781 65 509,892
406,033 141,779 729,312 1,277,124
73,957 884,288 36,000 994,245
15,276 491,222 165,000 671,498
406,033 365,546 2,941,711 201,431 33,482 3,948,203
1.01% 0.92% 1.82% 3.23%
Total, assets minus liabilities
454
(244,403)
(217,179)
(702,997)
164,263
1,035,127
35,265
ANNUAL ACCOUNTS
139
FY08
On demand
Assets Cash and balances with central banks (Note 5) Loans and advances to other credit institutions (Note 6) Loans and advances to other debtors (Note 9) Debt securities (Note 7) 65,659 40,611 175,358 1,557 283,185 Liabilities Deposits from central banks (Note 17) Deposits from financial institutions (at amortised cost) (Note 17) Deposits from other creditors (at amortised cost) (Note 18) Subordinate liabilities (Note 19) Other financial liabilities (Note 21) 593 2,336 77,600 1,556 39,552 121,637
Up to 1 month
More than 5 years
Total
Average interest rate for FY 2009
160,309 61,470 200,591 422,370
316,327 3,103 319,430
450,809 5,442 456,251
457,330 49,560 506,890
1,918,972 161,244 2,080,216
65,659 200,920 3,380,266 421,497 4,068,342
2.81% 3.54% 5.98% 4.15%
244,000 336,181 1,038,308 1,618,489
255,039 352,878 607,917
20,000 7,297 745,338 772,635
114,634 125,151 239,785
10,050 466,940 177,000 653,990
264,593 725,537 2,806,215 178,556 39,552 4,014,453
4.60% 4.39% 3.37% 6.04%
Total, assets minus liabilities
161,548 (1,196,119)
(288,487)
(316,384)
267,105
1,426,226
53,889
42. Exposure to credit risk

Credit risk represents the losses that the Bank would suffer should a customer or counterpart breach their contractual payment obligations. This risk is inherent in banks traditional banking products (mainly financial loans, credits and guarantees awarded) as well as in other types of financial assets (mainly debenture stock and derivatives portfolio). The credit risk affects both financial assets that are entered at their amortised cost in the financial statements, and assets that are entered at their fair value in these statements. Regardless of the accounting principle used to enter the Banks financial assets in the financial statements, the Bank applies the same credit risk control policies and procedures to these. The Banks Board of Directors approves the Banks credit risk control policies, methods and procedures. The Risks Division and the Banks Internal Audit Department are in charge of overseeing the correct fulfilment of these credit risk control policies, methods and procedures, making sure that they are suitable, efficiently implemented and revised regularly.
140
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
The credit risk control activities are carried out by the Control and Follow-up Unit, which depends directly on the Risks Division. This Unit is in charge of putting the credit risk control policies, methods and procedures approved by the Banks Board of Directors into practice. This Unit performs counterpart risk control, establishing, inter alia, the credit rating parameters to be assigned to the transactions carried out, as well as the credit risk needs, in keeping with the Banks internal policies and applicable regulations. Likewise, this Unit is responsible for applying the risk concentration limits that the Board of Directors has approved. The Bank applies policies and procedures that limit credit risk concentration in counterparts considered individually, as well as groups of companies. The Banks sets risk concentration limits by taking factors into account such as the business activity of counterparts, their geographical location, and other common economic factors. The Bank performs sensitivity analyses to estimate the effects of possible variations in the default rates of the various risk concentration groups. The Banks policies establish limits for these concentrations based on the sensitivity analyses performed. Except for risks faced with households in Spain holding a mortgage guarantee (533,995 thousand and 459,208 thousand as at 31 December 2009 and 2008, respectively) and those applied to finance construction activities (549,393 and 687,849 thousand as at 31 December 2009 and 2008, respectively) and real estate activities (930,935 and 794,110 thousand as at 31 December 2009 and 2008, respectively), the Group did not face significant risk concentrations. The average default rates of these three risk groups in FY09 were 0.99%, 6.07% and 3.02% respectively (0.60%, 4.029% and 1.348% in FY08). In addition, the Bank uses a credit scoring system that considers the characteristics of transactions and debtors that, in accordance with past experience and best practices on the market, the Bank can use to segregate the transactions that, depending on their credit risk, can be assumed, and others that cannot. The criteria for segregating transactions as soon as they are contracted by applying this system are approved by the Banks Board of Directors, in accordance with the revision procedures that make sure that this system is permanently updated. The maximum credit risk to which the Bank is exposed is measured, for the financial assets valued at their amortised value, by the paid-up and non-amortised cash. The calculation of this credit risk has considered the existence of offset agreements signed between the Group and various counterparts. Notes 6, 7, 8 and 9 of the Annual Report contain information about the maximum credit risk to which the Bank is exposed. It is worth pointing out that, given that the information provided in these Notes regarding the Banks credit risk does not consider the existence of guarantees received, credit derivatives contracted to hedge this risk and other similar hedges, this information differs from the analysis of the Banks internal credit risk exposure.
ANNUAL ACCOUNTS
141
The Bank classifies the financial assets subject to credit risk internally in accordance with the characteristics of the transactions, considering, inter alia, the counterparts with which the transactions have been contracted and the guarantees involved therein. The amount of financial income earned but not drawn from financial assets, which, in accordance with the criteria described in Note 2.8 have been considered as impaired, entered in the financial statements as at 31 December 2009 and 2008 amounts to 1,137 and 781 thousand, respectively. The following table shows the activity during FY09 and FY08 in the balance for the Banks impaired financial assets, which are not entered in the balance sheet since their recovery is considered remote even though the Bank has not suspended procedures to recover the debited amounts:
In thousands of euros Balance of financial assets for which recovery is considered remote as at 1 January 2008 Additions Balances for which recovery is considered remote in the year Recovery By cash payment without extra financing (Note 9) By assignment of suspended credits (Note 9) Transactions written off permanently Other causes Balance of financial assets for which recovery is considered remote as at 31 December 2008 Additions Balances for which recovery is considered remote in the year Recovery By cash payment without extra financing (Note 9) Transactions written off permanently Other causes (8) (482) 14,597 (378) 22,839 (386) (30,465) 6,206 47,862
Balance of financial assets for which recovery is considered remote as at 31 December 2009
36,946
42.1. Maximum risk exposure level The following table shows the maximum credit risk exposure level to which the Bank was exposed as at 31 December 2009 and 2008 for each type of financial instrument, without deducting the real guarantees or other credit enhancements received to ensure debtor compliance:
142
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
Asset balances Instrument types Financial assets at fair value through profit and loss Trading Other portfolio assets
107 107 2,807 2,807 1,565 1,565
Availablefor-sale financial assets

201,919 201,919
Loans and receivables
Held-tomaturity investments
302,538 302,538
Hedge derivatives
Memorandum accounts
Total
Loans and advances to other credit institutions (Note 6) Marketable securities (Notes 7 and 8) Total debt instruments Financial guarantees Financial guarantees Other contingent risks Total contingent risks Derivatives (Note 10) Contingent commitments Hybrid (Note 7) Total other exposures
61,875 3,382,790 3,444,665
22,869 22,869
49,242 196,450 245,692 293,402 350,754 644,156
61,875 504,564 3,382,790 3,949,229 49,242 196,450 245,692 319,078 350,754 1,565 671,397
Maximum credit risk exposure level
2,914
1,565
201,919
3,444,665
302,538
22,869
889,848 4,866,318
Asset balances Instrument types Financial assets at fair value through profit and loss Trading Other portfolio assets
1,825 1,825 9,677 9,677
Availablefor-sale financial assets

440,300 440,300
Loans and receivables
Held-tomaturity investments

Hedge derivatives
Memorandum accounts
Total
Loans and advances to other credit institutions (Note 6) Marketable securities (Notes 7 and 8) Total debt instruments Financial guarantees Financial guarantees Other contingent risks Total contingent risks Derivatives (Note 10) Contingent commitments Hybrid (Note 7) Total other exposures
200,920 3,380,266 3,581,186
30,503 30,503
53,481 203,704 257,185 903,500 387,257 1,290,757
200,920 440,300 3,380,266 4,021,486 53,481 203,704 257,185 935,828 387,257 9,677 1,332,762
Maximum credit risk exposure level
1,825
9,677
440,300
3,581,186
30,503 1,547,942 5,611,433
ANNUAL ACCOUNTS
143
42.2. Real guarantees received and other credit enhancements As a fundamental part of the Banks credit risk management, it ensures that the financial assets that it purchases or contracts have real guarantees and other credit enhancements apart from the debtors own personal guarantee. Depending on the transaction characteristics, such as the purpose of the risk, counterpart, term, equity consumption, etc., the Banks risk analysis and selection policies define the real guarantees and credit enhancements that these transactions should have apart from the debtors own real guarantee, in order to contract them. Real guarantees are assessed in accordance with the type of real guarantee received. Generally speaking, real guarantees in the form of property are assessed at their appraisal value that independent companies calculate in accordance with Bank of Spain regulations in order at the time they are contracted. Only if there is evidence of loss of value of these guarantees or where there is impairment in the debtors solvency that suggests that these guarantees might need to be used is this appraisal updated in accordance with the following criteria: real guarantees in the form of securities listed on active markets are included at their quoted price, revised by a percentage to cover possible changes in this market value that could affect the risk hedge; real guarantees are calculated by the guaranteed amount these transactions. Credit derivatives and similar transactions used to hedge to credit risk are included at their par value that is equivalent to the hedged risk in order to determine the hedge achieved; and guarantees in the form of pledged deposits are included at the value of these deposits, and if they are in foreign currency, converted at the exchange rate in force on the appraisal date. The following is a breakdown for each type of financial instrument of the maximum credit risk amount that each of the Banks real guarantees and credit enhancements hedges, as at 31 December 2009 and 2008:
2009
Other resident sectors Mortgage Secured by monetary deposits Secured by securities Other real guarantees 1,925,284 66,334 24,625 110,216 2,126,459 Other non-resident sectors Mortgage Secured by monetary deposits 14,922 1 14,923
2008
1,788,710 105,651 23,355 75,570 1,993,286
16,400 200 16,600
2,141,382
2,009,886
144
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
42.3. Credit rating of non-matured unimpaired financial assets 42.3.1. Analysis of credit risk exposure in accordance with credit ratings The following table shows the maximum credit risk exposure classified in accordance with the internal ratings that the Bank uses as at 31 December 2009 and 2008 for exposures that had neither matured nor were impaired on those dates: Credit and debt instrument rating
Normal, non-matured 2009
No appreciable risk Low risk Medium-low risk Medium risk Medium-high risk High risk 376,176 1,464,527 1,015,480 928,766 30,271 19,294 In thousands of euros
Substandard, non-matured 2009

7,203
2008
808,003 931,094 1,067,588 1,098,994 39,263 20,829
2008
1,023 2,549 13,414
Total
3,834,514
3,965,771
7,203
16,986
Contingent risk rating

2009
No appreciable risk Low risk Medium-low risk Medium risk Medium-high risk High risk 32,881 1,352 211,459
Normal, non-matured 2008

37,695 1,352 218,138
Total
245,692
257,185
43. Exposure to interest rate risk

The interest rate fair value risk is the risk that the Bank incurs when its assets and liabilities include certain financial instruments that accrue fixed or variable interest rates over time, the fair value of which may vary due to changes in the market interest rates. In the case of transactions with a variable interest rate, the Bank is exposed to the risk during the periods when the interest rates are recalculated. The market interest rate risk is mainly based on the purchase of fixed-interest securities included in the portfolio of assets available for sale, as well as in the Banks loans and credits portfolio and in the issue of fixed-rate liabilities, such as wholesale issues. As regards the interest rate cash flows risk, which is the risk that the expected cash flows of certain financial assets may vary due to variations in market interest rates, this is mainly due to the existence of loan and credits in the loans and receivables portfolio.
ANNUAL ACCOUNTS
145
The Control Unit performs the interest rate risk control. Said unit is responsible for putting into practice procedures that ensure that the Bank permanently fulfils the interest rate risk control and management policies set by the Assets and Liabilities Committee (COAP in Spanish). By implementing these policies, the Bank aims to reduce interest rate risks as far as possible, striking a balance with the Banks returns. The analysis, survey and control policies to prevent the Banks interest rate risk make use of sensitivity and scenario analysis techniques, and establish the appropriate limits to avoid exposure to excessive risk levels that could significantly affect the Bank. These analysis procedures and techniques are revised as often as necessary to ensure that they work properly. In addition, all the transactions that are individually significant for the Group are analysed separately and together with the rest of the Banks transactions, to ensure control of the interest rate risks and market risks to which the Bank is exposed due to the issue or purchase thereof. The Bank uses coverage transactions to individually manage the interest rate risk for all of the relevant financial instruments that may expose it to equally relevant interest rate risks. This virtually eliminates this type of risk (see Note 10). The following table shows the Banks level of exposure to the interest rate risk as at 31 December 2009 and 2008 for each significant currency. The table specifies the book value of the financial assets and liabilities affected by this risk, which are classified in accordance with the estimated time left until the interest rate is updated (for transactions of this type in accordance with their contractual conditions) or the due date (for transactions with fixed interest rates) and the book value of instruments covered under interest rate risk hedge transactions:
146
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
Time left until updating of interest rate in force or due date Up to 1 month
Denominated in euros Financial assets Variable interest rate Fixed interest rate 317 223 540 Financial liabilities Variable interest rate Fixed interest rate 202 632 834 Denominated in foreign currency Financial assets Variable interest rate Fixed interest rate 7 1 8 Financial liabilities Variable interest rate Fixed interest rate 3 13 16 11 11 23 23 1 1 4 4 1 3 4 6 6 2 2 1 1 1 1 1 1 56 448 504 137 1,350 1,487 97 97 31 30 61 5 360 365 310 310 693 176 869 1,669 170 1,839 22 92 114 1 13 14 333 333 13 13
In millions of euros
Between 3 months and 1 year
More than 5 years
8 106 114
135 135
22 22
Time left until updating of interest rate in force or due date Up to 1 month
Denominated in euros Financial assets Variable interest rate Fixed interest rate 258 621 879 Financial liabilities Variable interest rate Fixed interest rate 168 1,308 1,476 Denominated in foreign currency Financial assets Variable interest rate Fixed interest rate 4 4 2 2 6 6 5 5 4 4 1 1 1 1 84 675 759 274 697 971 74 74 2 26 28 2 2 325 325 591 207 798 1,368 207 1,575 4 56 60 146 146 41 41 51 51
More than 5 years
424 424
256 256
29 29
ANNUAL ACCOUNTS
147
Time left until updating of interest rate in force or due date
(Contd)
Up to 1 month

11 11
More than 5 years
Financial liabilities Variable interest rate Fixed interest rate 2 21 23 16 16 1 1 2 2
43.1. Interest rate risk sensitivity analysis The information given in this section on interest rate risk sensitivity for the statement of income and the economic value of the Banks equity has been prepared in accordance with the following methods and assumptions: The validity of the analyses included below should be set in the context of the current situation on domestic and international markets. Therefore, although regulations in force require that these analyses be undertaken in accordance with the changes that are considered to be reasonably possible in each risk variable, the climate on domestic and international financial markets makes it difficult to ascertain the probability of the different market variable trends, including the interest rate risk, so that it can be determined that some are reasonably likely compared to others. The analysis below has been performed taking two standard scenarios into account: 1) a cut in the market interest rate which significantly affects the Banks activity (EURIBOR) of 100 and 200 basic points compared to the interest rate as at 31 December 2009 (this trend is in line with the trend recorded for this rate over recent months); 2) and an increase of 100 and 200 basic points compared to the rate recorded in that date. The aforementioned analysis was conducted considering the performance of the EURIBOR at its different terms for which it has an impact for the Bank and keeping other variables that affect the Banks result and equity constant. The impact shown below was calculated in accordance with the financial instruments as at 31 December 2009 and 2008, without considering new investments or financing that might be undertaken during FY10. The above analysis was performed for a one-year period. In relation to the impact on the statement of income and equity, the outcome of the analysis shows how this change would affect the interest income (due to the effect on the interest and similar income that the Bank collects and pays) and the economic value of equity (for that purpose the economic value of equity is calculated as a sum of the reasonable value of the net interest-sensitive assets and liabilities and of the net book value of the non-interest-sensitive assets and liabilities), in accordance with the criteria established in Bank of Spain Circular 3/2008. The effects are shown before taxes in each case.
148
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
By applying the methods and assumptions mentioned above, the following table shows the estimated impact that an increase and a reduction of 100 and 200 basic points would immediately have on the Euribor at its different terms, in contrast to the data recorded as at 31 December 2009: Sensitivity analysis as at 31 December 2009
Impact on statement of income Interest income
100 bp Euribor increase 200 bp Euribor increase 100 bp Euribor reduction 200 bp Euribor reduction (6,211) (7,857) 9,189 17,122 In thousands of euros
Gains and losses on financial assets and liabilities

(78) (151) 83 172
Total effect on gains/losses

(6,289) (8,008) 9,272 17,294
Effect of net equity valuation adjustments

(20,572) (21,236) 56,505 163,254
Sensitivity analysis as at 31 December 2008

Impact on statement of income Interest income
100 bp Euribor increase 200 bp Euribor increase 100 bp Euribor reduction 200 bp Euribor reduction (5,534) (10,452) 5,799 12,452
Gains and losses on financial assets and liabilities

Total effect on gains/losses

(5,534) (10,452) 5,799 12,452
Effect of net equity valuation adjustments

(13,361) (25,233) 15,185 32,607
ANNUAL ACCOUNTS
149
43.2. Exposure to price risk regarding equity instruments

2009 Impact on statement of income - gains/ losses on financial assets and liabilities (net)
100 bp increase of market price 100 bp reduction of market price 1 (1)
2008 Impact on statement of income - gains/ losses on financial assets and liabilities (net)
79 (79)
Impact on valuation adjustments recorded in net equity

(377) 377
Impact on valuation adjustments recorded in net equity

(13,631) 15,185
44. Exposure to other market risks

The Bank does not keep foreign currency for speculative purposes. Likewise, the Bank does not keep non-speculative open positions (without hedge) of relevant amounts of foreign currency. Moreover, there is a set limit for the net foreign currency position of the computable equity which may not exceed 5% of this. Annual customer service report In accordance with article 17 of Order ECO/734/2004, 11 March, passed by the Ministry of the Economy, regarding the Customer Service Departments and Customer Ombudsman of the Financial Institutions, the following is a summary of the Annual Report submitted by the person in charge of the Service. a) Statistical summary of complaints dealt with The Customer Service Department received 372 and 270 complaints during FY09 and FY08, of which 364 were processed (notwithstanding the existence of reasons for non-admission in the Service Regulations). The types of complaints submitted were as follows:
Typology % of complaints received 2009
Reversals Lack of due diligence Procedure Forms of payment Other complaints 44.89% 27.15% 12.63% 4.84% 10.49%
2008
25.56% 33.70% 21.85% 10.74% 8.15%
The cost of complaints solved during FY09 amounted to 56 thousand (105 thousand in FY08).
150
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
The result of the analysis performed on the responses given to customers is given below:
Typology No of complaints 2009
In the claimants favour In the Banks favour Not processed Pending reply 154 206 8 4
2008
135 124 7 4
372
270
The decision criteria that the Service uses are mainly based on similar cases in the Resolutions passed by the Bank of Spain, the National Securities Market Commission and the Directorate General for Insurance and Pension Funds (approximately 80% of the cases). Where this reference does not exist, the response is given in accordance with advice from the Banks Legal Services, depending on the specific circumstances causing the complaint. b) Recommendations or suggestions from past experience, with a view to improved fulfilment of the purposes of the Groups activity There is a Follow-up Committee that, chaired by the General Secretary and with participation from all the areas involved, sets criteria that are later used to improve the quality of the services provided to customers. This follow-up involves several measures, which range from taking into account the complaints lodged in order to assess the Unit to which they relate, to the revision of product marketing procedures and information supplied to customers. Twenty and fourteen complaints were submitted to the Bank of Spain during FY09 and FY08, of which seven were resolved in the customers favour, four are yet to be settled, one was filed and eight were in the Banks favour. During this financial year, the Bank has had two complaints submitted to the National Securities Market Commission, which are yet to receive a reply. The Banks Directors consider that the settlement of unresolved complaints will not result in quantities or consequences of any kind that will have a significant effect on the financial statement.
ANNUAL ACCOUNTS
151
45. Information required under the Revised Corporate Income Tax Law in relation to the merger of Gest 21, S.L.U. and Galeban Energa S.A.U.
In accordance with article 93 of the Revised Corporate Income Tax Law (Royal Legislative Decree 4/2004, 5 March), information relating to the companys merger with Gest 21, S.L.U. and Galeban Energa S.A.U., described in Note 1, is given below: Last balance sheet that the merged company, Gest 21, S.L.U. closed (Balance sheet as at 31 December 2008)
Gest 21, S.L.U. (Balance sheet as at 31 December 2008) ASSETS
NON-CURRENT ASSETS Intangible fixed assets Software Tangible fixed assets Technical installations and other tangible fixed assets Long-term investments in Group companies and associates Equity instruments 31-12-2008 17,377 0 0 0 0 17,377 17,377
CURRENT ASSETS Trade debtors and other accounts receivable Current tax assets Short-term investments in Group companies and associates Loans to companies Short-term financial investments Loans to companies Cash and other equivalent liquid assets Cash and Banks
12,010 1 1 8,094 8,094 1 1 3,914 3,914
Total assets
29,387
152
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
LIABILITIES NET EQUITY CAPITAL AND RESERVES Share Reserves Legal and statutory Other reserves Profit/loss from previous years Profit for the year Interim dividend
31-12-2008 23,782 23,782 21,840 1,109 1,134 (25) 48 4,685 (3,900)
CURRENT LIABILITIES Short-term payable Other financial liabilities Trade creditors and other accounts payable Miscellaneous creditors Current tax liabilities
5,605 3,900 3,900 1,705 2 1,703
29,387
ANNUAL ACCOUNTS
153
Last balance sheet that the merged company, Galeban Energa S.A.U. closed (Balance sheet as at 31 December 2008)
ASSETS
NON-CURRENT ASSETS Tangible fixed assets Fixed assets in progress and advances Long-term investments in Group companies and associates Equity instruments Loans to companies Long-term financial investments Equity instruments Loans to third parties 31-12-2008 20,410 11,376 11,376 6,270 5,010 1,260 2,764 1,371 1,393
CURRENT ASSETS Non current financial assets held for sale Trade debtors and other accounts receivable Miscellaneous debtors Current tax assets Short-term investments in Group companies and associates Loans to companies Other financial assets Short-term financial investments Loans to companies Other financial assets Cash and other equivalent liquid assets Cash and Banks
89,886 66,000 1,217 480 737 18,880 18,874 6 726 35 691 3,063 3,063
Total assets
110,296
154
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
LIABILITIES NET EQUITY CAPITAL AND RESERVES Share Reserves Legal and statutory Other reserves Profit for the year Interim dividend ADJUSTMENT DUE TO CHANGE IN VALUE Available-for-sale financial assets
31-12-2008 46,500 1,700 300 127 60 67 2,723 (1,450) 44,800 44,800
NON CURRENT LIABILITIES Long-term payable to group and associate companies Deferred tax liabilities
19,631 431 19,200
CURRENT LIABILITIES Short-term payable Other financial liabilities Short-term payable to group companies and associates Trade creditors and other accounts payable Miscellaneous creditors Current tax liabilities
44,165 3,007 3,007 38,105 3,053 2,726 327
110,296
ANNUAL ACCOUNTS
155
List of assets transferred to the Bank subject to amortisation, showing the year in which they were acquired, their cost and the accumulated amortisation at which they were recorded, which are the same as the amounts at which they have been included in the Bank (see Note 1). Galeban Energa, S.A.U.
Description
Villacarrilla solar power plant Tarazona solar power plant Pozacaada solar power plant
Year acquired
2007-2008 2008 2008
Acquisition method
Purchase Purchase Purchase
Cost
11,266 55 55

Net book value

11,266 55 55
11,376
11,376
46. Breakdown of transactions and activities that members of the Board of Directors carried out
Breakdown of shareholdings in companies with similar activities and performance, for itself or for others, of similar activities by the Administrators In accordance with article 127 of the Companies Law, passed by Law 26/2003, 17 July, which amended Law 24/1988, 28 June, regarding the Securities Market, and the Revised Text of the Companies Law, in order to reinforce the openness of limited companies, the following table shows companies with the same, a similar or a complementary activity as regards the Banks corporate purpose, in whose capital the members of the Board of Directors have a shareholding, as well as the duties that they perform in these, where applicable:
Holder Controlled company
Banco Bilbao Vizcaya Argentaria, S.A. Santander Central Hispano, S.A. Banco Espaol de Crdito, S.A. Julio Fernndez Gayoso Bankinter, S.A. Banco Popular, S.A. Banco Sabadell, S.A. Mapfre, S.A. scar N. Rodrguez Estrada Banco Bilbao Vizcaya Argentaria, S.A. Banco Bilbao Vizcaya Argentaria, S.A. Antonio Abril Abadn Santander Central Hispano, S.A. Banco Sabadell S.A. Banco Popular, S.A.
Activity
Banking transactions Banking transactions Banking transactions Banking transactions Banking transactions Banking transactions Banking transactions Banking transactions Banking transactions Banking transactions Banking transactions Banking transactions
Shareholding
21,808 Shares 38,725 Shares 3,780 Shares 4,700 Shares 18,054 Shares 13,652 Shares 27,500 Shares 2,102 Shares 9,207 Shares 2,527 Shares 1,200 Shares 1,000 Shares
Functions

156
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
Titular
Sociedad participada
Banco Bilbao Vizcaya Argentaria, S.A
Actividad
Banking transactions Banking transactions Banking transactions Banking transactions Banking transactions Banking transactions
Participacin
5,080 Shares 13,000 Shares 2,025 Shares 2,169 Shares 5,616 Shares 1,070,000 Shares
Funciones

ngel Lpez-Corona Dvila
Santander Central Hispano, S.A. Banco Pastor, S.A.
Jos Luis Pego Alonso Epifanio Campo Fernndez
Banco Bilbao Vizcaya Argentaria, S.A. Banco Bilbao Vizcaya Argentaria, S.A Banco Pastor, S.A.
Likewise, and in accordance with the aforementioned Revised Text, the following table shows the performance of activities, for themselves or for others, by the various members of the Board of Directors of a same, similar or complementary nature as regards the Banks corporate purpose:
Name Activity carried out at Banco Gallego
Deputy Chairman Deputy Chairman Julio Fernndez Gayoso Deputy Chairman Deputy Chairman Deputy Chairman scar N. Rodrguez Estrada Board Director Board Director Isaac A. Mguez Lourido Board Director Board Director Jos Luis Pego Alonso Gregorio Gorriarn Laza Board Director Board Director Board Director Board Director Ramiro Mato Garca-Ansorena Board Director Board Director Board Director
How the activity is carried out

As an employee As an employee As an employee As an employee As an employee As an employee As an employee As an employee As an employee As an employee As an employee As an employee As an employee As an employee As an employee As an employee
Company through which activity is carried out

Caixa de Aforros de Vigo, Ourense e Pontevedra Caixanova Ahorro Corporacin, S.A. Lico Corporacin, S.A. Lico Leasing, S.A. Caser, S.A. Caixa de Aforros de Vigo, Ourense e Pontevedra Caixanova Caixa de Aforros de Vigo, Ourense e Pontevedra Caixanova Celeris Servicios Financieros, S.A. Financiera Inmobiliaria Proinova, S.L. Caixa de Aforros de Vigo, Ourense e Pontevedra Caixanova Caixa de Aforros de Vigo, Ourense e Pontevedra Caixanova BNP Paribas Sucursal en Espaa BNP Paribas Espaa, S.A. BNP Paribas Asset Management, SGIIC, S.A. Bolsas y Mercados Espaoles Banco Cetelem Espaa, S.A.
Duties assigned or carried out in the aforementioned company

Chairman Board Director, Executive Committee Member Chairman and Executive Committee Member Board of Directors Member Board Director, Executive Committee Member and Life Insurance Committee Chairman Deputy General Manager Senior Manager Board Director Managing Director General Manager Deputy General Manager General Manager Board Director Board Director Board Director Board Director
ANNUAL ACCOUNTS
157
Appendix I
Breakdown of companies that Banco Gallego controlled indirectly as at 31 December 2009
Company
Address
Activity
Amount of shareholding (thousands of euros)

2,951 300 14,126 2,000 61 6,000 30 2,254 358 3,197 3 24 37 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 74
Galeban 21 Comercial, S.L.U. Geleban Gestin de Riesgos, S.A.U. Gest 21 Inmobiliaria, S.L.U. Elica Galenova, S.L. Galego Preferentes, S.A.U. Inmobiliaria Valdebebas 21, S.L. Cantabria Generacin, S.L. Banco Gallego Vida y Pensiones, S.A. de Seguros y Reaseguros (***) Adara Renovables, S.L. Luzentia Fotovoltaica, S.L. Villacarrilla F.V., S.L. Inesga Inversiones Estratgicas de Galicia, S.A. (**) Fotovoltaica de la Hoya de los Vicentes 171, S.L. Casiopea Energa 1, S.L Casiopea Energa 2, S.L Casiopea Energa 3, S.L Casiopea Energa 4, S.L Casiopea Energa 5, S.L Casiopea Energa 6, S.L Casiopea Energa 7, S.L Casiopea Energa 8, S.L Casiopea Energa 9, S.L Casiopea Energa 10, S.L Casiopea Energa 11, S.L Casiopea Energa 12, S.L Casiopea Energa 13, S.L Casiopea Energa 14, S.L Casiopea Energa 15, S.L Casiopea Energa 16, S.L Casiopea Energa 17, S.L Casiopea Energa 18, S.L Casiopea Energa 19, S.L Fotovoltaica de la Hoya de los Vicentes 106, S.L.
A Corua A Corua A Corua A Corua Madrid Madrid Santander Madrid A Corua Madrid Madrid Santiago de Compostela Jumilla Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Jumilla
Sales Insurance Broker Property development Wind Power Issue of shares Property development Technical project study and design Insurance Broker Wind Power Wind Power Solar Power Business management advice Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power
158
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
% capital held by Bank (% shareholding present) Direct

100% 100% 100% 33% 100% 27% 50% 50% 34% 26% 100% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Details of controlled company Net book value Capital (*)

2,951 300 14,126 6,000 61 22,000 60 9,015 1,200 513 3 478 74 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 74
Indirect
0% 0% 0% 0% 0% 12% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
% total shareholding
100% 100% 100% 33% 100% 39% 50% 50% 34% 26% 100% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Reserves (*)
387 113 971 1,476 1 (32) (1) (93) (250) 2,370 12 (6) 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 (6)
Gains/ losses for the year (*)

(277) 23 (856) 4,882 1 (1,564) (22) (132) 10,997 (3) 4 16 (2) (2) (2) (2) (1) (1) (1) (1) (1) (1) (1) (1) (2) (2) (2) (2) (2) (2) (2) 16
Date of statements (*)

Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-08 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09
300 8,865 2,000 61 6,000 30 2,254 358 3,197 3 24 37 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 74
ANNUAL ACCOUNTS
159
(Contd)
Company
Address
Activity

107 74 74 74 74 74 98 74 74 74 74 74 74 74 74 74 3 3 3 3 3 3
Fotovoltaica de la Hoya de los Vicentes 113, S.L. Fotovoltaica de la Hoya de los Vicentes 119, S.L. Fotovoltaica de la Hoya de los Vicentes 121, S.L. Fotovoltaica de la Hoya de los Vicentes 127, S.L. Fotovoltaica de la Hoya de los Vicentes 130, S.L. Fotovoltaica de la Hoya de los Vicentes 131, S.L. Fotovoltaica de la Hoya de los Vicentes 144, S.L. Fotovoltaica de la Hoya de los Vicentes 162, S.L. Fotovoltaica de la Hoya de los Vicentes 163, S.L. Fotovoltaica de la Hoya de los Vicentes 164, S.L. Fotovoltaica de la Hoya de los Vicentes 165, S.L. Fotovoltaica de la Hoya de los Vicentes 166, S.L. Fotovoltaica de la Hoya de los Vicentes 167, S.L. Fotovoltaica de la Hoya de los Vicentes 168, S.L. Fotovoltaica de la Hoya de los Vicentes 169, S.L. Fotovoltaica de la Hoya de los Vicentes 170, S.L. Boreal Renovables 14, S.L. Boreal Renovables 15, S.L. Boreal Renovables 16, S.L. Boreal Renovables 17, S.L. Boreal Renovables 18, S.L. Boreal Renovables 19, S.L.
Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Madrid Madrid Madrid Madrid Madrid Madrid
Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power
(*) Data taken from each controlled companys unaudited balance sheets as at 31 December 2009, subject to approval from the relevant General Shareholders Meetings. The Banks Directors do not think that any changes will be made during the approval procedure. (*) Data taken from each controlled companys unaudited balance sheets as at 31 December 2008. (***) The share capital information is given without excluding the outstanding payments.
160
ANNUAL ACCOUNTS
2009 ANNUAL REPORT

100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Details of controlled company Net book value Capital (*)

74 74 74 74 74 74 74 74 74 74 74 74 74 74 74 74 3 3 3 3 3 3
Indirect
0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Reserves (*)
(6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6)
Gains/ losses for the year (*)

16 16 16 16 16 16 16 16 16 16 16 16 16 16 16 16

Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09
107 74 74 74 74 74 98 74 74 74 74 74 74 74 74 74 3 3 3 3 3 3
ANNUAL ACCOUNTS
161
Appendix II
Company
Address
Activity

1,000 18 3 589 1,225 5,742 407 736 792 1,000 216 60 634 4,205 56,190 3,864 124 3,579 961 3 5,995 1,350 58 3,798 2 1,230 294 625
Gala Domus, S.A. (*) (****) Edificio Veganorte, S.L. (*) (*****) Maewo Inversiones, S.L. (*) (****) Filmanova Invest, S.A.U. (**) (*****) Ribera Casares Golf, S.L. (*) (****) Decovama 21, S.L. (*) (*****) Leva-Yorma, S.L. (*) (****) Bajo Almanzora Desarrollos Inmobiliarios, S.L. (*) (****) Agraria del Guadarrama, S.L (*) (*****) Berilia Grupo Inmobiliario, S.L. (*) (****) Filmanova, S.L. (**) (*****) Petrus y Buena Gestin, S.L. (*) (*****) Inversiones Valdeapa 21, S.L. (*) (****) Fega Unin, S.L. (*) (****) Enerfin Enervento, S. A. (***)(*****) Verum Inmobiliaria Urbanismo y Promocin, S.A. (*) (****) Verum Carabanchel, S.A. (*) (****) Inmobiliaria Valdebebas 21, S.L. (*) (****) Alarde Sociedad de Energa, S.A. (***) (*****) Galenova Sanitaria, S.L. (**) (*****) Gest Galinver, S.L. (*) (****) CSR Inversiones Sanitarias Sur, S.A. (**) (*****) Desarrollos Urbansticos SAU 6, S.L. (*) (*****) Metalplast C.F.E., S.L. (**) (*****) Visualmark Internacional, S.L. (**) (*****) Gest Madrigal, S.L. (*) (****) Pemapro, S.L. (*) (****) Arraimat Peninsular, S.L. (*)
A Corua Madrid Madrid A Corua Madrid Madrid Madrid Almera Madrid Madrid A Corua Madrid Madrid Madrid Bilbao Madrid Madrid Madrid Madrid Madrid Madrid
Property development Property development Property development Producciones cinematogrficas Property development Property development Property development Property development Property development Property development Producciones cinematogrficas Property development Property development Property development Wind Power Property development Property development Property development Wind Power Health Property development Property development Industrial Industrial Property development Property development Property development
Las Palmas de Gran Canaria Health Madrid A Corua A Corua A Corua A Corua Valencia
162
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
% capital held by Bank (% shareholding present) Direct Indirect % total shareholding

50% 8.48% 48% 14.73% 49% 20.30% 49% 36.28% 33% 40% 14.73% 20% 15.80% 48% 10% 92% 63% 39% 17% 50% 84.55% 8% 2% 20% 20% 100% 49% 7.42%
Details of controlled company Net book value Capital (****)

2,000 210 6 5,695 2,500 28,284 830 2,030 2,400 2,500 107 300 4,010 8,760 46,900 4,200 180 22,000 62 6 6,580 27,000 2,900 31 11 1,230 601 8,425
Reserves (****)
421 73 36 (372) 55 5,171 (7) (226) (24) (14) 315 123 (280) 24 53,314 3,140 165 (32) 911 101 (3,775) (180) 2,574 (1) (335) 1 (61)
Gains/ losses for the year (****)

(1,610) (148) (15) (499) 8 543 (144) (90) (3) (101) 131 (57) (124) 5 10,853 (1,146) (70) (1,564) 730 (1) (153) (5,805) 3 (5) (14) 1 3
Date of statements (****)

Dec-09 Dec-08 Dec-09 Dec-07 Dec-09 Dec-08 Dec-09 Dec-09 Sep-09 Dec-09 Dec-07 Sep-09 Dec-09 Dec-09 Dec-08 Dec-09 Dec-09 Dec-09 Dec-09 Dec-08 Dec-09 Nov-07 Dec-08 Jun-08 Sep-08 Dec-09 Dec-09 Dec-09
0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 27% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
50% 8.48% 48% 14.73% 49% 20.30% 49% 36.28% 33% 40% 14.73% 20% 15.80% 48% 10% 92% 63% 12% 17% 50% 84.55% 8% 2% 20% 20% 100% 49% 7.42%
1,000 18 3 589 1,225 5,742 407 736 792 1,000 216 60 634 4,205 56,190 3,864 124 3,579 961 3 5,995 1,350 58 3,798 2 1,230 294 625
ANNUAL ACCOUNTS
163
(Contd)
Company
Address
Activity

376 2 3 3
Inmobiliaria Panaderos 21, S.L. (*) (*****) Solgomar Energa, 3S.L. (***) (****) Fotonova Energa, S.L. (***) (****) Invern Gestin, S.L.U. (*) (****) Ondasol Energa, S.L. (***) (****) Azimut Energa, S.L. (***) (****) Planasol Energa, S.L. (***) (****) Solnova Energa, S.L. (***) (****) Solarana Energa, S.L. (***) (****) Tornasol Energa, S.L. (***) (****) Solaqui Energa, S.L. (***) (****)
Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid
Property development Wind Power Wind Power Property development Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power
(*) Indirect shareholding through Gest 21 Inmobiliaria, S.L.U. (**) Indirect shareholding through Galeban 21 Comercial, S.L.U. (***) Indirect shareholding through Eolica Galenova, S.L.U. (****) Data taken from each controlled companys unaudited balance sheets as at 31 December 2009, subject to approval from the relevant General Shareholders Meetings. The Banks Directors do not think that any changes will be made during the approval procedure. (*****) Latest available data, taken from the unaudited balance sheets of each controlled company.
164
ANNUAL ACCOUNTS
2009 ANNUAL REPORT

15.01% 17% 33% 100% 17% 33% 17% 33% 17% 33% 17%

2,503 3 3 3 3 3 3 3 3 3 3
Reserves (****)
(21) (114) (77) (52) 3 3 3 3 3 3 2

(3) (101) (74) (868) 2 2 2 2 2 2 2

Dec-08 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09 Dec-09
0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
15.01% 17% 33% 100% 17% 33% 17% 33% 17% 33% 17%
375 2 3 3 3 3 3 3 3 3 3
ANNUAL ACCOUNTS
165
Appendix I 2008
Breakdown of companies that Banco Gallego controlled directly as at 31 December 2008
Company
Address
Activity
Gest 21, S.L.U.
Madrid
Galeban Energa, S.A.U. Galego Preferentes, S.A. (**) Inmobiliaira Valdebebas 21, S.L. (**)
Madrid A Corua Madrid
Investment Management Company Investment Management Company Issue of shares Property development
21,882
218 61 6,000
(*) Data taken from the unaudited balance sheets of each controlled company as at 31 December 2008. (**) Data taken from the unaudited balance sheets of each controlled company as at 31 December 2008.
166
ANNUAL ACCOUNTS
2009 ANNUAL REPORT
% capital held by Bank (% shareholding present) Direct Indirect % total shareholding Net book value Capital (*)
Details of controlled company Reserves (*) Gains/ losses for the year (*)
4,685

Dec-08
100%
0%
100%
21,882
21,840
1,157
100% 100% 27%
0% 0% 14%
100% 100% 41%
218 61 6,000
127 61 22,000
2,723 1 4
2,723 43
Dec-08 Dec-08 Dec-08
ANNUAL ACCOUNTS
167
Appendix II 2008
Company
Address
Activity

300 14,126 600 18 156 2,950 589 294 5,256 235 309 792 1,000 216 60 466 401 2,000 60,000 864 124 961 3 1,634 1,350 58 3,798 2 1,230 294
Galeban Gestin de Riesgos, S.A. Gest 21 Inmobiliaria, S.L.U. Gala Domus, S.A. (*) Edificio Veganorte, S.L. (*) Maewo Inversiones, S.L. (*) Galeban 21 Comercial, S.L.U. Filmanova Invest, S.A. (**) Ribera Casares Golf, S.L. (*) Decovama 21, S.L. (*) Leva-Yorma, S.L. (*) Bajo Almanzora Desarrollos Inmobiliarios, S.L. (*) Agraria del Guadarrama, S.L (*) Berilia Grupo Inmobiliario, S.L. (*) Filmanova, S.L. (**) Petrus y Buena Gestin, S.L. (*) Inversiones Valdeapa 21, S.L. (*) Fega Unin, S.L. (*) Elica Galenova, S.L. (***) (******) Enerfin Enervento, S. A. Verum Inmobiliaria Urbanismo y Promocin, S.A. (*) Verum Carabanchel, S.A. (*) Alarde Sociedad de Energa, S.A. Galenova Sanitaria, S.L. (**) Gest Galinver, S.L. (*) CSR Inversiones Sanitarias Sur, S.A. (**) Desarrollos Urbansticos SAU 6, S.L. (*) Metalplast C.F.E., S.L. (**) Visualmark Internacional, S.L. (**) Gest Madrigal, S.L. (*) Pemapro, S.L. (*)
A Corua A Corua A Corua Madrid Madrid A Corua A Corua Madrid Madrid Madrid Almera Madrid Madrid A Corua Madrid Madrid Madrid A Corua Bilbao Madrid Madrid Madrid Madrid Madrid
Insurance Broker Property development Property development Property development Property development Sales Cinema productions Property development Property development Property development Property development Property development Property development Cinema productions Property development Property development Property development Wind Power Wind Power Property development Property development Wind Power Health Property development Property development Industrial Industrial Property development Property development
Las Palmas de Gran Canaria Health Madrid A Corua A Corua A Corua A Corua
168
ANNUAL ACCOUNTS
2009 ANNUAL REPORT

0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

300 14,126 1,200 210 6 2,951 5,695 600 26,034 480 1,030 2,400 2,500 107 300 2,950 1,002 6,000 46,900 1,200 180 62 3 6,580 27,000 2,900 31 11 1,230 601
Indirect
100% 100% 50% 8.48% 52% 100% 10.35% 49% 20.19% 49% 30% 33% 40% 14.26% 20% 15.80% 40% 33.33% 10% 72% 49% 17% 50% 23.15% 5% 2% 20% 20% 100% 49%
100% 100% 50% 8.48% 52% 100% 10.35% 49% 20.19% 49% 30% 33% 40% 14.26% 20% 15.80% 40% 33.33% 10% 72% 49% 17% 50% 23.15% 5% 2% 20% 20% 100% 49%
Reserves (****)
101 1,320 632 73 54 400 (372) 11 5,171 (7) (192) (6) (14) 315 (1) 175 79 677 53,314 3,125 162 714 25 (3,775) (180) 2,574 (1) (331) 4

27 (349) (83) (148) (19) (14) (499) 44 543 (23) (4) 131 1 (15) 6 2,799 10,853 35 3 1,701 82 (5,805) 3 (5) (4)

Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-07 Dec-08 Dec-08 Dec-08 Sep-08 Dec-07 Dec-08 Dec-07 Dec-07 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Nov-07 Dec-08 Jun-08 Sep-08 Dec-08 Dec-08 ANNUAL ACCOUNTS
300 14,126 600 18 3 2,950 300 294 5,258 235 309 792 1,000 216 60 466 401 2,000 60,000 864 124 961 3 1,634 1,350 58 3,798 2 1,230 294
169
(Contd)
Company
Address
Activity

375 133 358 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 98 98 98 98 98
Inmobiliaria Panaderos 21, S.L. (*) Luzentia Fotovoltaica, S.L. Adara Renovables, S.L. Solgomar Energa, 3S.L. Fotonova Energa, S.L. Invern Gestin, S.L.U. (*) Ondasol Energa, S.L. Azimut Energa, S.L. Planasol Energa, S.L. Solnova Energa, S.L. Solarana Energa, S.L. Tornasol Energa, S.L. Solaqui Energa, S.L. Vitigudina F.V., S.L. Villacarrilla F.V., S.L. Casiopea Energa 1, S.L. (***) Casiopea Energa 2, S.L. (***) Casiopea Energa 3, S.L. (***) Casiopea Energa 4, S.L. (***) Casiopea Energa 5, S.L. (***) Casiopea Energa 6, S.L. (***) Casiopea Energa 7, S.L. (***) Casiopea Energa 8, S.L. (***) Casiopea Energa 9, S.L. (***) Casiopea Energa 10, S.L. (***) Casiopea Energa 11, S.L. (***) Casiopea Energa 12, S.L. (***) Casiopea Energa 13, S.L. (***) Casiopea Energa 14, S.L. (***) Casiopea Energa 15, S.L. (***) Casiopea Energa 16, S.L. (***) Casiopea Energa 17, S.L. (***) Casiopea Energa 18, S.L. (***) Casiopea Energa 19, S.L. (***) Orin Energa 3, S.L. (***) Orin Energa 14, S.L. (***) Orin Energa 19, S.L. (***) Orin Energa 20, S.L. (***) Orin Energa 21, S.L. (***)
Madrid Madrid A Corua Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid
Property development Wind Power Wind Power Wind Power Wind Power Property development Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power
170
ANNUAL ACCOUNTS
2009 ANNUAL REPORT

15% 20.74% 34% 17% 33% 100% 17% 33% 17% 33% 17% 33% 17% 46.66% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

2,503 641 1,200 3 3 3 3 3 3 3 3 3 3 6 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 98 98 98 98 98
Reserves (****)
(21) 1,736 (101) (21) (9) (1) 1 1 1 1 1 1 1 (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1)

(3) 1,024 (149) (93) (68) (51) 2 2 2 2 2 2 2 16 16 15 15 16 16 15 17 16 16 16 16 16 15 15 15 15 15 14 7 7 7 7 7

Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 ANNUAL ACCOUNTS
0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
15% 20.74% 34% 17% 33% 100% 17% 33% 17% 33% 17% 33% 17% 46.66% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
375 3,197 358 2 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 98 98 98 98 98
171
(Contd)
Company
Address
Activity

98 98 98 98 98 98 98 98 98 3 3 3 3 3 3 74 74 74 74 74 74 74 74 74 74 74 74 74 74 74 74 74 56
Orin Energa 22, S.L. (***) Orin Energa 23, S.L. (***) Orin Energa 24, S.L. (***) Orin Energa 25, S.L. (***) Orin Energa 26, S.L. (***) Orin Energa 27, S.L. (***) Orin Energa 28, S.L. (***) Orin Energa 29, S.L. (***) Orin Energa 30, S.L. (***) Boreal Renovables 14, S.L. (***) Boreal Renovables 15, S.L. (***) Boreal Renovables 16, S.L. (***) Boreal Renovables 17, S.L. (***) Boreal Renovables 18, S.L. (***) Boreal Renovables 19, S.L. (***) Fotovoltaica de la Hoya de los Vicentes 106, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 113, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 119, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 121, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 127, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 130, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 131, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 144, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 162, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 163, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 164, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 165, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 166, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 167, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 168, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 169, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 170, S.L.U. (***) Fotovoltaica de la Hoya de los Vicentes 171, S.L.U. (***)
Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Madrid Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla Jumilla
Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power Solar Power
(*) Indirect shareholding through Gest 21 Inmobiliaria, S.L.U. (**) Indirect shareholding through Galeban 21 Comercial, S.L.U. (***) Indirect shareholding through Gest 21, S.L.U. (****) Data taken from the balance sheets of each controlled company as at 31 December 2008.
172
ANNUAL ACCOUNTS
2009 ANNUAL REPORT

0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

98 98 98 98 98 98 98 98 98 3 3 3 3 3 3 74 74 74 74 74 74 74 74 74 74 74 74 74 74 74 74 74 74
Indirect
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 75%
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 75%
Reserves (****)
(1) (1) (1) (1) (1) (1) (1) (1) (1) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6) (6)

7 7 7 7 7 7 7 7 7 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08 Dec-08
98 98 98 98 98 98 98 98 98 3 3 3 3 3 3 74 74 74 74 74 74 74 74 74 74 74 74 74 74 74 74 74 74
ANNUAL ACCOUNTS
173
Audit report
FINANCIAL STATEMENT AUDIT REPORT To the Shareholders of Banco Gallego, S.A.: 1. We have audited the financial statement of Banco Gallego, S.A. (hereinafter the Bank) which include the balance sheet as at 31 December 2009 and the statement of income, the cash flow statement, the statement of changes in net equity and the annual report for the year ended on that date, the preparation of which the responsibility of the Banks Directors. Our duty is to pass an opinion about the aforesaid financial statements as a whole, based on the work undertaken in accordance with generally accepted audit standards in Spain, which require a study, through selective testing, of the evidence backing the financial statement and the evaluation of submission thereof, of the applied accounting principles and of the estimates made. 2. In accordance with Spanish mercantile legislation, with each of the items on the balance sheets, statement of income, cash flow statement, statement of changes in net equity and annual report for the year 2008, the Banks Directors submit those relating to the previous year for comparison purposes. Our opinion refers exclusively to the 2009 financial statement. On 11 March 2009 we issued our audit report regarding the 2008 financial statement, in which we passed a favourable opinion. 3. The Banks Directors separately prepared the consolidated financial statement of Grupo Banco Gallego for FY09, on which we issued our audit report on 5 February 2010, in which we passed a favourable opinion. In accordance with the contents of said consolidated financial statement, prepared by virtue of the EU International Financial Reporting Standards, the total amount of the Groups net equity as at 31 December 2009 was 4,254,899 and 238,184 thousand, respectively, and the net consolidated profit for the Group in FY09 was 7,420 thousand. 4. We think that the enclosed 2009 financial statement gives a true and fair view of all of the significant aspects of the equity and financial position of Banco Gallego S.A. as at 31 December 2009 and of the results of its transactions, changes in net equity and in cash flows, for the year ended on that date. We also think that it contains the necessary, sufficient information for proper interpretation and comprehension thereof, in accordance with the accounting principles and standards contained in Bank of Spain Circular 4/2004, which are the same as those applied the previous year. 5.The 2009 management report contains the explanations that the Directors deem necessary regarding the Banks position, its business trends and other matters, and it is not an integral part of the financial statement. We have checked that the accounting information contained in the aforesaid management report matches the information in the 2009 financial statement. Our job as auditors is limited to checking the management report within the scope mentioned above, and does not include checking other information than that obtained from the Banks bookkeeping records. DELOITTE, S.L. Registered in the R.O.A.C. No. 50692 Miguel Barroso Rodilla 5 February 2010
176
AUDIT REPORT
2009 ANNUAL REPORT
AUDIT REPORT
177
Annual Corporate Governance Report
180
ANNUAL CORPORATE GOVERNANCE REPORT
2009 ANNUAL REPORT
ANNUAL CORPORATE GOVERNANCE REPORT FOR OTHER COMPANIES THAT ISSUE SECURITIES ADMITTED TO TRADING ON SPANISH OFFICIAL SECONDARY MARKETS THAT ARE NOT SAVINGS BANKS
For a better understanding of the model and subsequent preparation thereof, the instructions provided at the end of this report for completing the form should be read.
A
A.1
Ownership structure
Banco Gallegos most significant shareholders at year-end:
% of corporate capital
49.84 7.27 (1) 10.50 (2) 3.91 10.10 (3) 3.79 3.08
Shareholders Name or Corporate Name

Caixa de Aforros de Vigo, Ourense e Pontevedra Juan Manuel Urgoiti Lpez-Ocaa Javier Ungra Lpez BNP Paribas Epifanio Campo Fernndez Ramn Bahamonde Santiso Inditex
(1) 0.90% direct shareholding and 3.51% indirect shareholding in ACTIVEST, S.A. and 2.86% representation of Jos Antonio de Castro (2) Indirect shareholding through Ungra Patentes y Marcas, S.A., 5.25% and Grupo Paramus, S.L., 5.25%. (3) Indirect shareholding through Inverpuente, S.L., 2.38% and Rodonita, 7.72%.
A.2
Relationships of a family, commercial, contractual or company nature that exist between the significant shareholders, to the extent that Banco Gallego knows about them, except when they are of little importance or result from ordinary draft or commercial trade:
The company does not know of any family, contractual or business relationship between significant shareholders other than those that result from ordinary draft or commercial trade and the business relationships identified in point A.1 above and described below:
Related names or corporate names
Juan Manuel Urgoiti Lpez-Ocaa
Type of relationship
Business
Brief description
Board of Directors Member, Inditex Audit Committee Member and Appointments and Remuneration Committee Member
181
A.3
Relationships of a family, commercial, contractual or company nature that exist between the significant shareholders and Banco Gallego, except when they are of little importance or result from ordinary draft or commercial trade:
The commercial, contractual or business relationships between significant shareholders and the company and/or group are described in point C of this report.
B Banks administrative structure

B.1 Board of Directors B.1.1. aximum and minimum number of directors or members of the Board of M Directors established in the articles of association:
Maximum number of Board directors/members Minimum number of Board directors/members 20 6
B.1.2. Board of Directors Members and their status Board of Directors members
Name or corporate name of director/ member of the Board of Directors
Juan Manuel Urgoiti Lpez-Ocaa Julio Fernndez Gayoso Antonio Abril Abadn Ramn Bahamonde Santiso Ramiro Mato Garca-Ansorena Epifanio Campo Fernndez Saturnino Cuquejo Iglesias Gregorio Gorriarn Laza ngel Lpez-Corona Dvila Jos Luis Losada Rodrguez Isaac Alberto Mguez Lourido Jos Luis Pego Alonso Oscar Rodrguez Estrada Ignacio Santillana del Barrio Javier Ungra Lpez lvaro Urgoiti Gutirrez ngel Varela Varas E: D: I: S: Executive Director External Representative Director External Independent Director Secretary
Representative
N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Last appointment date

11/04/2008 11/04/2008 26/04/2008 11/04/2008 11/04/2008 11/04/2008 11/04/2008 11/04/2008 11/04/2008 11/04/2008 11/04/2008 11/04/2008 11/04/2008 11/04/2008 11/04/2008 11/04/2008 30/04/2001
Status
E E D D D D D D D E D D D I D D S
182
2009 ANNUAL REPORT
B.1.3. oard of Directors members who fulfil director or manager posts in other comB panies that belong to Grupo Banco Gallego:
Name or corporate name of director/member of the Board of Directors
Jos Luis Losada Rodrguez Jos Luis Losada Rodrguez
Corporate name of the group company

Inmobiliaria Valdebebas 21,S.L. Enerfin Enervento, S.A.
Office
Board Member Board Member
B.1.4. ccrued aggregate remuneration of Board of Directors members during the A year:
Wage item
Fixed remuneration Variable remuneration Allowances Other remuneration
Single
1,504 81 524
Group

Total
2,109
The contribution to the pension fund during the year was 542 thousand. B.1.5 Senior Management members who are not Board of Directors members and total accrued remuneration in their favour during the year:
Name or corporate name
Jos Carlos Cordero de la Lastra Fernando Ortega Cmbara Manuel Prol Cid Joaqun Espallargas Iberni Isaac Snchez Monge Francisco Javier Alonso Muoz
Office
Senior Manager Senior Manager Senior Manager Senior Manager Senior Manager Senior Manager
Total remuneration for Senior Management (in thousands of euros)
1,066
B.1.6. The articles of association or the board regulation set a limited mandate for Board of Directors members: YES
Maximum number of years of office
NO
5 years, unlimited re-election art. 41
183
B.1.7. The individual and consolidated financial statements which are submitted to the Board of Directors for approval are certified beforehand: YES NO The Board of Directors prepares the financial statement and submits it for approval to the General Shareholders Meeting. Once it has been approved, the Secretary and Chairman certify it for it to be recorded. B.1.8. Systems that the Board of Directors has established to ensure that the individual and consolidated statement that it has drawn up is not presented to the General Shareholders Meeting with reservations in the audit report. The Board of Directors strives to draft a permanent version of the statement to avoid reservations in the auditors report. However, when the Board thinks that its judgement should be reserved, it will explain the contents and scope of the discrepancy to the public. B.1.9. Does the Board of Directors secretary have director status? YES NO
B.1.10. ystems established to safeguard the independence of the auditor, financial S analysts, investment banks and rating agencies. The Board of Directors has established the rule to not hire audit firms in which the fees estimated for all of the services represent an unsuitably high percentage of their annual income, based on the average for the last five years. The hiring of the audit firm will also be subject to the condition that the person in charge of the team assigned to Banco Gallego is replaced every seven year at least. Services other than audits that might compromise the independence of the audit firm will not be hired from it. Finally, prior to the appointment of auditors at the General Shareholders Meeting, at the Board of Directors proposal, the Board receives a report from the Audit Committee on this matter. The company has no explicit rating and has not hired the services of a rating agency, nor has it hired the services of investment banks or financial analysts. The Board of Directors will publish a public report on the overall fees that the company has paid to the audit firm for services other than audits..
184
2009 ANNUAL REPORT
B.2. Board Committees or Administrative Bodies B.2.1. Administrative Bodies:

Name of the body
Delegated Executive Committee Audit Committee
No. of members
6 5
Functions
See B.2.3. See B.2.3.
B.2.2. Board Committees or Administrative Bodies and members: Delegated Executive Committee
Name
Julio Fernndez Gayoso Juan Manuel Urgoiti Lpez-Ocaa Ramn Bahamonde Santiso Gregorio Gorriarn Laza ngel Lpez-Corona Dvila (baja noviembre 2009) Javier Ungra Lpez Jos Lus Pego Alonso (alta noviembre 2009) Jos Luis Losada Rodrguez
Office
Chairman Deputy Chairman Board Member Board Member Board Member Board Member Board Member Secretary
Audit Committee
Name
Gregorio Gorriarn Laza ngel Lpez-Corona Dvila Epifanio Campo Fernndez Javier Ungra Lpez Jos Luis Pego Alonso ngel Varela Varas
Office
Chairman Board Member Board Member Board Member Board Member Secretary
B.2.3. Rules for operation and organisation, and powers delegated to each of the board committees or administrative body members. The Executive Committee is legally granted all of the Board of Directors powers, except those which cannot be delegated by Law. Regardless of the foregoing, in practice the limit for approval of asset transactions is 3 million, with transactions exceeding this limit being submitted to the Board of Directors for consideration. The Audit Committee has the following powers: 1. Reporting to the General Shareholders Meeting regarding questions that shareholders pose in areas within their competence. 2. Proposing the appointment of the auditor or external auditors to the Board of Directors for proposal to the General Shareholders Meeting. 3. Overseeing the companys internal audit services. 4. Understand the financial information process and the internal control systems of the Company.
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5. Maintaining relationships with external auditors in order to receive information on those questions that may compromise their independence and any others relating to the audit process, in addition to other information provided for in auditing legislation and in the technical audit standards. 6. Reporting to and advising the Board on the enforcement of good corporate governance rules and other rules of conduct. B.2.4. Number of meetings that the Audit Committee has held during the year:
Number of meetings 4
B.2.5. There is no Appointments and Remuneration Committee.
C Related transactions
C.1. Relevant transactions that involve transfer of funds or obligations between Bank Gallego or group companies and the Banks most significant shareholders:
Most important shareholders name or corporate name Name or corporate name of the company in its group Nature of the relationship Type of operation Amount (in thousands of euros)
No relevant transactions were undertaken with significant shareholders or other shareholders and those undertaken were part of regular trade and carried out in market conditions. The companys annual report contains the significant balances for the Bank and its shareholders. C.2. Relevant transactions that involve transfer of funds or obligations between Bank Gallego or group companies and Directors or Administrative Body members, or the Banks executives:
Name or corporate name of the directors or members of the administrative body or executives
Name or corporate name of the company in its group
Nature of the relationship
Type of operation
Amount (in thousands of euros)
There are no transactions for the Banks directors and executives that are considered relevant. These undertaken were part of regular trade and carried out in market conditions (See point 9).
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C.3. Significant transactions carried out with other companies belonging to the same group, always provided that they are not eliminated in the process of drawing up consolidated financial statements and do not form part of the companys normal trade as regards their object and conditions:
Corporate name of the group company Brief description of transaction Amount (in thousands of euros)
C.4. Conflicts of interest in which the directors or administrative body members are involved, as provided for under article 127 of Spains Company Law (LSA in Spanish). The directors shall act with the diligence of an organised businessman and loyal representative. The directors main duties consist of: a) Helping to oversee the corporate management entrusted to the Board of Directors, always faithful to the companys interest. b) Always ensuring that the company shareholders interests are protected. c) Attending the meetings of the bodies on which they sit and actively participating in debates. d) Refraining from using the Companys name or using their status as directors in order to carry out transactions on their own account or on behalf of persons with whom they have ties. e) Not making investments or carrying out any transactions related to the Companys assets of which they come to learn while performing their duties in their own personal benefit or that of persons with whom they have ties. f) Reporting any direct or indirect conflict with the Companys interest into which they come, refraining from intervening in the case of a conflict. g) Reporting any shareholding they have in the capital of a company with the same, a similar or complementary type of activity as the corporate purpose, as well as any offices or duties they hold therein. h) Keeping confidential information a secret, even if they no longer sit on the Board, and keeping information, data, reports or background that they learn as a result of their office confidential. i) Not using the Companys assets for personal use or using their position to gain personal financial benefit to which they are not entitled, unless they have paid the necessary financial consideration. C.5. Systems established to detect, establish and solve possible conflicts of interest between the company and/or its group and its directors, managers or significant shareholders Refrain from participating in debates that affect them regarding matters in which they have a personal interest, in other words, when the matter affects a relative up to the fourth degree of kinship, or a company in which they fulfil executive posts and in which they have a shareholding less than 5% of the share capital, informing the board in advance about any conflict of interest that may arise.
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Notifying the company about all of the relevant posts and/or relationships that they hold in companies and especially those affected by regulations on senior bank positions. The Banks Directors and some executives and other people who work for the Bank are subject to the Internal Rule of Conduct regarding the Securities Market. Article eight of this refers to reporting conflicts of interest, whereas: i) Directors and employees shall prepare a declaration of significant economic, family or other ties with the Banks customers for services related to the securities market or listed companies for the Bank and shall keep this updated. ii) Economic ties cover a direct or indirect shareholding of more than 5% of the capital in customers for services related to the securities market, provided that the companys status as the Banks customer is known and this results in the rendering of relevant services, or more than 1% in listed companies. iii) Family ties cover up to the second degree of kinship through consanguinity or affinity (ascendants, descendents, brothers and sisters and spouses of brothers and sisters) with customers for services related to the securities market (with the same condition as above) or with people who hold administration or management positions in customers for this type of services or in listed companies. iv) The declaration shall also include other ties that in the opinion of an outside and impartial observer could compromise a director or employees unbiased actions. If there is reasonable doubt in this regard, the directors and employees must check with the body to which the next section refers.
D Risk control systems

Banco Gallego has risk control systems that cover all of its activities, mainly focused on the commercial banking business. These systems cover the credit or counterpart risk, market risk and cash flow risk and there are formal authorisation, tracking and control procedures applied in accordance with the type and amount in question. These are supervised by Banco Gallegos decision-making bodies, more specifically the Credit Committee for the former and General Management and the Assets and Liabilities Committees for the latter two. Also, the Global Risk Committee, formed by the risk management and control areas, establish specific procedures to improve the Banks risk management, with a global approach and both supervising the management processes for each of the risk and providing advice on them in relation to Senior Management.
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These systems are in keeping with the type of activity and the structure and amount of the assumed risks, and they fulfil the Banks risk profile. The current analysis and control systems are assessed below. D.1. Credit risk analysis The Bank has set up a formal allocation of powers system to grant risks, according to which the organisations various levels have delegated powers to authorise transactions, which vary depending on the risk type and amount. As mentioned later on, their validity in time is subject to the needs to adapt to the economic situation. To that effect, the organisational levels in the commercial banking areas are: firstly, the Branch, differentiated in accordance with its different tiers; then the Regional Department, Central Risks Departments, the Banks General Management and the Executive Committee, which acts as the delegated committee of the Board of Directors. At each of these levels there is a limit of delegated powers for risk assumption through sanctions under Risk Committees set up at each level. The scope of powers, which includes the breakdown of powers by amounts and products, as well as exceptions and regulations for their use, are included in circulars issued throughout the entire Organisation for that purpose, adapting to the economic and financial situation at all times. The initiative for a new operation always originates at a branch, to take decisions if it falls within its powers, or to report and send it to the next level if it falls outside them. The same rule applies at the next levels. Therefore, operations for greater amounts will have to be evaluated throughout the entire chain of powers. None of the Banks offices or areas, regardless of the hierarchical level of the person who manages it, has to power to undertake, or even propose, risk operations outside the aforementioned circuit. The procedure is similar in the other business areas, except that risk proposals originate at the relevant operational Branch. Operations that fall outside the aforementioned powers are finally submitted to the Board of Directors. Risks with related parties, such as operations for members of the Board of Directors, Executive Management or companies related to them, are expressly excluded from the aforementioned delegated powers. Authorisation therefore falls exclusively to the Board of Directors, regardless of the amount in question. In these cases, it is common and necessary for the member of the aforementioned boards who is involved in the operation to refrain from attending the discussion and sanction procedures. D.2 Credit risk tracking and control
For years the Bank has established a permanent credit risk tracking system that allows it to assess the rating at the creditor level and for all of the risks classified by different attributes. This allows special watch systems for the performance of specific customers and operations to be set up, aiming to anticipate possible problematic situations through preventive measures on the risks underway. The purpose of this system is to have risk assets for which the rating is checked, keeping an arrears level in line with the sector average.
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The tracking method is mainly based on regularly analysing information prepared on default customer and operation variables, detecting variations in their performance that are deemed abnormal. The Tracking Department is centralised in the Risk Division through the Risk Tracking and Control Department, which specialises exclusively in tracking activities, carrying these out systematically, by checking and issuing information, taking measures and holding regular tracking committee meetings. The Risk Department depends directly on General Management, is independent from Business Management and reports directly to the Banks Executive Committee. The Tracking Department is structured in accordance with the Commercial Departments, in coordination with them, which optimises its activity through more knowledge and direct contact with the customer and nearest market. The tracking levels are based on daily incident reports to which Branches, Business Managements and Control and Tracking Departments have access. These reports record all of the variables considered relevant to track the risk, with a breakdown of their amount and type (overdues, overdrafts, unpaid trade discounts, unpaid loans, etc). All of the formalisation procedures carried out during the day are also controlled, checking the risk authorisations (scope of powers and sanction) that cover these formalisation procedures, not only in terms of the risk, but also in terms of profitability, ensuring enforcement of the sanction as far as financial conditions are concerned. Any incident that arises in these daily controls is passed on to the necessary bodies for clarification and solution. The monthly tracking committee meetings ratify the supervision activities and recap the performance of the incident rate, taking measures to keep the system running efficiently. The daily tracking of risk uses the aforementioned warning system. However, whenever these warnings require and in any case on an annual basis, the risk analysts supplement this tracking with an individual analysis of the assets customers, updating the financial and management information and issuing sanctions to either renew or keep the risk position, unless this analysis advises corrective measures for the position, in which case specific instructions from each customer are passed on. The departments involved analyse the sanctions in accordance with the different risk levels and depending on their powers, as mentioned above. The regular analysis of customers includes a series of previously-identified parameters, such as: Economic-financial trends. Updating in financial-tax information. Management trends. Related market trends. Positions and relationships with other companies.
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Financial requirements. Outside information. Strength of administration and shareholder bodies, in the case of companies. Medium-term strategic plan. Compliance with financial and cross-business commitments with the Bank. Level of incidents and development thereof. Development of incident warnings. The outcome of the analysis of these parameters is included in the customers file with the relevant recommendation and sanction. Regarding the first point, three ratings are established: Normal (A): For customers who, having recorded an incident and after a thorough examination of the risks and financial position, it is concluded that its development is satisfactory. Tracking (B): applied to creditors who, following the aforementioned examination, display a sign of weakness in the development of their risks. Special tracking (C): creditors who show signs of problems due to the incidents that occurred or the development of their economic-financial situation. This rating involves the suspension of delegated powers to grant new risks to these customers. In relation to the risks policy to be followed, there are three levels: Risks to be contained (X): customers with a risk that does not present incidents. However, due to the customers solvency, economic and financial positions, guarantees, etc. it is thought that they have reached a risk limit that should not be exceeded. Risks to be reduced (Y): creditors that have problems with their economic-financial or equity position or with the repayment of their risks, for which a lower exposure level is advisable. Risks to be terminated (Z): customers with negative development or who present incidents or breaches, for which the risks should be cancelled. Ratings Y and Z for a customer involve suspending the delegated powers to grant new risks. The combination of both groups of codes depending on the circumstances of each analysed case is included in graph form in the creditors file. This is a teleprocessing application that includes all of the customers positions, providing their ratings in a straightforward, clear manner to be taken into account in risk-related decisions. This technical warning system is supplemented by the analysts report. It is a system integrated in the aforementioned file that, through responses to a questionnaire related to the customers performance, risks, incidents, financial position, guarantees, etc. allows the policy that needs to be applied to be summed up, establishing the necessary measures to ensure the positive development of their risks. These reports are written on every decision level and whenever necessary in accordance with the incidents, warnings, new risk proposals, etc.
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On a regular basis, analyses of loans and receivables are submitted at the General Management committee meeting, evaluating various parameters by sector, transaction type, terms, geographical areas, growth rates, performance, transaction inflow, etc. that provides a dynamic, up-to-date view of the loans and receivables structure. The most suitable marketing and risk management strategies can be developed from the evaluated information and the market trend analysis, in both economic and financial terms. The Bank properly diversifies its risks in accordance with a large number of attributes, more than required by Law. It is worth noting that no customer of group of customers who form an economic group reaches any of the concentration limits that the Bank of Spain has established. D.3. Arrears management Arrears management, which starts when the first risk irregularity situation develops, involves coordinated action at different levels. Firstly, the branch network acts, supervised by the Prelitigation Department, followed by intervention from the Recovery Department, and finally, if necessary, the Legal Department takes legal action. This first out-of-court procedure, coordinated centrally by the Prelitigation Department, which is part of the Risk Division, is the claim mentioned above. Recovery is attempted through direct negotiation with the debtors, in which branches or other higher levels can intervene depending on the amounts in question or other variables, established in the regulations or through a decision from the Tracking Committee. Posting arrears involved immediate intervention from the internal legal teams, who are coordinated and notified beforehand, who will act swiftly and efficiently to solve the dispute. The legal teams, including the dependent Recovery Department, specialising in legal disputes can be backed by outside legal teams, on a national scale, if necessary. To efficiently manage the arrears situation, the Bank has IT applications integrated in teleprocessing that allow specific and precise tracking of the development of arrears risks. It also has specific, coordinated IT systems that provide information on the general development of the arrears situation in the Company, with segment analyses, and in particular of customers, indicating the stage of the legal proceedings and recovery of the unpaid credit. D.4. Market risk tracking and control The Bank has set up an Assets and Liabilities Committee (COAP in Spanish) that specialises in market risk analysis and control to avoid market variables (interest rates and exchange rates) or strategies that the Bank itself has not define undergoing undesirable changes or adding excessive volatility to the statement of income.
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The Executive Director and General Manager chairs the Committee and executives from the Banks following areas sit on it: Senior Management Finance Technical Area Corporate Development Sales Area Risks The COAP is the central figure in the global balance sheet management process and is responsible for global risk and solvency management, for defining the wholesale and retail balance sheet structure, establishing and supervising operational limits related to balance sheet and off-balance sheet risks and defining the price structure and new products. It has executive duties that have a binding effect on all of the Banks operations and its activity consists of putting the Board of Directors decisions into practice. The COAP analyses the impact of different interest rate performance scenarios on the balance sheet and on the financial margin. It sets short- and medium-term policies to manage balance sheet volumes and studies financing transactions on monetary and capital markets. Also, depending on the market situation, the COAP lays the foundations to implement the Banks commercial policy in terms of assets and liabilities prices and products. The Bank has an ALM tool to analyse the interest rate repreciation gap with dynamic balance sheet simulations, calculate the Banks economic value based on different scenarios and take other necessary measures to properly manage the interest rate risk. The Bank is also upgrading the Value at Risk (VaR) daily calculation systems (with a 99% confidence level) of the market area positions (monetary markets, capital markets, variable rate market and derivatives market), back-testing procedures to check the advantages of the models used, stress testing to assess the impact of possible adverse market conditions, and others. D.5. Cash flow risk tracking
The body in charge of controlling this risk is also the Assets and Liabilities Committee (COAP), which has been described above. The Bank has formal procedures to analyse and track its global cash flow position which include contingency plans in the event of incidents due to internal causes or outside events. The COAP makes proposals on the limits on access to the monetary market and on capital market transactions (issuing debt and preference shares), which must later be submitted to the Board of Directors for authorisation.
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The Committee oversees enforcement of the aforementioned monetary market financing limits and sublimits in accordance with the timeframe for the transactions. It also monitors other capital market transactions. The COAP also oversees the Banks issues in wholesale markets. As is the case with interest rate risk, the Bank has instruments to analyse the cash flow gap for the different timeframes, perform dynamic simulations of its performance in accordance with different scenarios and keep proper control over its cash flow situation.
General Meeting of Shareholders
E.1. Specify the quorum for the General Shareholders Meeting as established in the articles of association. Describe how this differs from the minimum levels required under Spains Company Law (LSA). Under article 32 of the Articles of Association, the Ordinary or Special General Shareholders Meeting is properly constituted at the first sitting when the shareholders present or represented by proxy hold at least 25% of the paid-up voting capital. At the second sitting, a quorum representing any percentage of the capital is sufficient for a properly constituted Meeting. However, so that the Ordinary or Special General Shareholders Meeting can validly agree on the issue of bonds, capital increase or reduction, the Companys conversion, merger, split-off or voluntary dissolution and, in general, any changes to the Articles of Association, attendance at the first sitting is necessary from present or represented shareholders owning at least 50% of the paid-up voting capital. For the case above, at the second sitting attendance from 25% of this capital will be sufficient. Art. 32.3 [...] when shareholders representing less than fifty percent of the paid-up voting capital, the resolutions mentioned above can only be validly adopted with a vote in favour from two thirds of the capital present or represented at the Meeting. This system is not different from the minimum levels provided for in Spains Companies Law. E.2. Explain the system of adopting corporate resolutions. Describe how it differs from the system under the LSA. The General Shareholders Meeting resolutions will be adopted through a majority vote of those present or represented, except where specified otherwise in article 32.3 of the Articles of Association and except in the cases in which the Law requires other majority votes. This system is not different from the requirements under Spains Companies Law.
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E.3.
Describe any rights of shareholders in connection with general meetings that differ from those established in the LSA.
In accordance with article 28 of the Articles of Association, shareholders who own five hundred or more shares will be entitled to attend General Shareholders Meetings. Shareholders owing less than this amount can form groups until this number is reached. As regards the right of representation, the Articles of Association (article 29) lay down that any shareholder with right of attendance can delegate his or her powers of representation to another person even if he or she is not a shareholder. There is no special provision regarding the method of granting representation powers, public request for representation powers and representation powers for family members envisaged in the LSA, except relating to the granting of representation power through means other than in writing and distance voting, which are not included in the provisions. E.4. Briefly describe the resolutions adopted at General Shareholders Meetings and percentage of votes with which each resolution was adopted.
At the Ordinary Shareholders Meeting, all of the shareholders present or represented unanimously adopted the following resolutions: Item One on the Agenda. Examination and approval, as applicable, of corporate management of the financial statement and management report, and adoption of resolution on profit allocation proposal, as well as the consolidated financial statement and consolidated management report for Banco Gallego, Sociedad Annima, all relating to the financial year ended 31 December 2008. All of the shareholders present unanimously agree to approve the management of the companys Board of Directors, financial statement, management report and profit allocation, as well as the consolidated financial statement and consolidated management report, all relating to FY08. They also unanimously agree to allocate the profit for FY08 amounting to 15,148,496.67 as follows:
euros Corporate Income Tax Forecast Net profit Application: To reserves To the legal reserve To voluntary reserves To asset dividend 8,581,312.19 1,260,751.22 7,320,560.97 4,026,199.92 2,540,984.56 12,607,512.11
Consequently, a dividend of 0.29 gross per share is agreed, which will be paid from 28 April 2009 onward, without profits being allocated to shares resulting from the capital increase on 30 December 2008.
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Item Two on the Agenda. Number of Directors: dismissal, appointment and re-election of Directors There is no proposal under this item of the agenda. Item Three on the Agenda. Appointment and re-election of Auditors. The shareholders unanimously agree to re-elect Deloitte, S.L., with Spanish nationality, address at Madrid, plaza Pablo Ruiz Picasso, 1 (Torre Picaso), registered in the Companies House of Madrid, volume 13.650, folio 188, section 8, page M-54.414, Tax Identification Code number B-79104469, as auditor of the companys individual and consolidated statement for FY09. The delegate the Board of Directors powers to set the remuneration for this audit firm for the entire period during which it renders this service. Item Four on the Agenda. Delegating the Directors the power to agree on a share capital increase in one or several stages under the terms established in art. 1531 b) of Spains Company Law. In accordance with article 153.1.b) of Spains Companies Law, the shareholders unanimously agree to delegate the Board of Directors the power to increase the share capital in one or several stages and at any time, within a maximum of five years (5) from the date on which this resolution is approved, as applicable, at the General Shareholders Meeting, up to a limit of 59,521,020.64, equivalent to half of the share capital, by issuing new ordinary shares, preference or another type allowed by Law, including redeemable shares, with or without share premium and with or without voting rights, their exchange value consisting of monetary contributions, being able to set the terms and conditions for the capital increase and freely offering the new unsubscribed shares within the period or periods of exercise of the preferential subscription The Board of Directors is empowered so that, in the event of incomplete subscription, it can decide that the share capital only be increased by the amount of subscriptions made and reword the article of the Articles of Association on share capital. The shareholders also unanimously agree to grant the Board of Directors, with express powers to replace any of its members and/or Executive Committee members, the power to fully or partly exclude the right of preferential subscription for shareholders and holders of convertible and/or exchangeable fixed-income securities and/or warrants in relation to share issues to which this delegation of powers refers, in accordance with article 159.2 and others under Spains Companies Law, provided that it is in Companys interest and it fulfils other applicable legal requirements. In any event, if the Board of Directors decides to eliminate the right of preferential subscription in relation to a specific share issue that it decides to make in accordance with the present authorisation, at the same time as it approves the issue it shall deliver a report specifying the specific reasons relating to corporate interest that justify this measure, which will be subject to the equivalent report from the Auditor to which article 159.2 of Spains Companies Law refers. These reports will be given to the shareholders and holders of convertible obligations or bonds and presented to the first General Shareholders Meeting that is held after the issue has been approved.
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Item Five on the Agenda. Revoking the unused powers delegated at the General Shareholders Meeting on 11 April 2008 to issue obligations or securities that create or acknowledge a debt and new powers delegated at the Board of Directors to issue, in one or several stages, obligations or securities that acknowledge or create a debt (simple or mortgage, notes, in euros or in foreign currency, fixed-rate or variable-rate, with temporary or permanent duration) that cannot be converted into shares, including preference shares, in legally-established terms, either directly or through companies set up specifically for that purpose, in which Banco Gallego, S.A. has a 100% shareholding, or whose voting rights relate, in their entirety , to the financial institution that controls the consolidated group, in accordance with the amount, circumstances, conditions and limits that the General Shareholders Meeting establishes and authorisation to request their listing on secondary markets. It is unanimously agreed to revoke the unused powers conferred to the Board of Directors at the Ordinary General Shareholders Meeting on 11 April 2008 under point Five on the agenda for said meeting, to issue obligations or securities that create or acknowledge a debt and grant the Board of Directors powers so that within a maximum period of five years from the date of the present agreement and once the necessary administrative authorisations have been received and subject to legal provisions in force, it can issue, in one or several stages, obligations or securities of any type that acknowledge or create a debt (simple or mortgage -certificates, shareholdings, bonds-, notes, in euros or in foreign currency, fixed-rate or variable-rate, subordinated or not, with temporary or permanent duration, secured or not, individual or in series) that cannot be converted into shares, including preference shares, in legally-established terms, either directly or through companies set up specifically for that purpose, in that case jointly and severally securing and guaranteeing the obligations resulting from the issue for the issuing company. The overall limit for all of those issues cannot exceed 1.2 billion. Notwithstanding the foregoing, when securities with a due date of less than one year are issued, either through an issue program or not, for the purposes of calculating the overall limit only the balance of securities issued at less than one year will be taken into account. It is unanimously agreed to authorise the Board of Directors to request, when and if necessary, the listing of the securities that can be circulated in accordance with the present agreement on secondary markets. It is unanimously agreed to authorise the Board of Directors to appoint the person or people who must record the agreements from the present General Shareholders Meeting in a public document that require this procedure or that need to be registered in public registries; request and achieve the registration of those that are necessary in the Companies House; sign the necessary deeds of rectification, ratification, correction or clarification in order to receive a verbal and/or written rating from the Company Registrar; enforce and fulfil all of the agreements at the General Shareholders Meeting that require a specific activity for that purpose, as broadly as required by law -and in any way- interpret, apply and develop, including correcting or rectifying, if necessary to adapt them to the requirements of the competent authorities, regarding those that are subject to administrative authorisation, all of the agreements adopted at the General Shareholders Meeting until all of the requirements legally established for them to become valid have been fulfilled.
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Item Six on the Agenda. Revoking the powers granted to purchase own shares and conferring new powers within the limits and requirements under Spains Company Law and additional or explanatory provisions. It is unanimously agreed to revoke the part of the period conferred to the Board of Directors at the Ordinary General Shareholders Meeting on 11 April 2008 for share buyback that has not elapsed and it is also unanimously agreed to re-authorise the Board of Directors so that if there is an offer for the Banks paid shares it can, on behalf of the Bank or any of the Groups companies, purchase them through a deed of sale or through assignment by way of payment, at the price calculated from the accounts, granting a validity period for the present powers of authorisation of 18 months from the date on which the present agreement is adopted. Point Seven. Merger of the companies GEST 21, S.L., Sociedad Unipersonal and GALEBN ENERGA, S.A., Sociedad Unipersonal (merged companies) which BANCO GALLEGO, S.A. (acquiring company) acquired, in the terms and conditions established in the Single Merger Project that their administrative bodies prepared on 10 March 2009. In accordance with the Single Merger Project that the Boards of Directors of the companies BANCO GALLEGO, S.A., GEST 21, S.L., Sociedad Unipersonal and GALEBN ENERGA, S.A., Sociedad Unipersonal signed, they unanimously agree to proceed with the merger of the companies GEST 21, S.L. y GALEBN ENERGA, S.A., which are taken over by BANCO GALLEGO, S.A. Acquiring company: The company BANCO GALLEGO, S.A. was incorporated for an indefinite period by means of a deed authorised by Madrid Notary Mr. Miguel Mestanza Fraguero, on 13 May 1991, under number 1.996 of his protocol. The companys registered address is in Santiago de Compostela (A Corua), calle Hrreo, number 38. It is registered in the Companies Register of Santiago de Compostela, in volume 2.142 of the Register File, Section 8, folio 141, page no. 22.011. Its Fiscal Identification Code is A- 80.042.112. Merged companies: The company GEST 21, S.L., Sociedad Unipersonal was incorporated for an indefinite period by means of a deed authorised by Madrid Notary Mr. Vctor Manuel Garrido de Palma, on 2 August 1991, under number 1.939 of his protocol. The companys registered address is in Madrid, calle Henri Dunant, number 17. It is registered in the Companies Register of Madrid, in volume 1.463 of the Register File, General Section, folio 175, page number M-27.177. Its Fiscal Identification Code is B- 80.102.817. The company GALEBN ENERGA, Sociedad Unipersonal was incorporated for an indefinite period by means of a deed authorised by Madrid Notary Mr. Jos Periel Garca, on 31 July 2002, under number 3.383 of his protocol. The companys registered address is in Madrid, calle Henri Dunant, n 17. It is registered in the Companies Register of Madrid, in volume 2.623 of the Register File, General Section, folio 85, page number M-2729.325. Its Fiscal Identification Code is A- 15,849,573.
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The Merger Balance Sheets will be the balance sheets of the acquiring company and the merged companies that their administrative bodies prepared and closed as at 31 December 2008, because these fulfil the requirements in paragraph two of article 239.1 of the Spanish Companies Law. In accordance with the aforementioned section 2 of article 239.1 of the Spanish Companies Law, it is hereby noted that the acquiring company is obliged to audit its annual accounts. Its Merger Balance Sheet was therefore inspected by the Companys Auditor before it was approved at the General Shareholders Meeting. It is also hereby noted that the Merger Balance Sheets of the merged companies were not inspected by the auditor because those companies were not under this obligation. Pursuant to section 2 of the aforementioned article 239 of the Spanish Companies Law, the Merger Balance Sheets are subject to approval and deliberation at the General Shareholders Meeting of the acquiring company and the Single Shareholder Meeting of the merged companies. Given that, as mentioned above, the acquiring company and the merged companies fulfil the provisions of article 250 of the Spanish Companies Law relating to simplified mergers, no capital increase in the acquiring company will be necessary and no share swap will take place. The transactions of the merged companies, which will become extinct as a result of the merger, must be considered carried out, for accounting purposes, on behalf of the acquiring company, from 1 January 2009 onwards. In this regard, it is agreed to submit the merger to the tax system under the aforementioned law, in every aspect, and to that end the Ministry of Finance will be informed of the decision to use said system in accordance with article 42 and following of Royal Decree 1777/2004, 30 July, which approves the Corporate Income Tax Regulation. Item Eight. Approval of the Merger Balance Sheet closed as at 31 December 2008 It is unanimously agreed to use the last annual balance sheet approved at this General Shareholders Meeting, closed as at 31 December 2008, as the Merger Balance Sheet. Item Nine. Incentive Policy: Options Plan It is unanimously agreed to approve the following Options and Incentive Plan in accordance with the following terms and conditions: Authorise the delivery of Banco Gallego, S.A. shares up to a maximum of 99,036 shares, representing 0.5% of the current capital, to be used selectively to keep Executives (maximum of 50 people) and Executive Board Members (the Beneficiaries) motivated and loyal. The Board of Directors or, by delegation, the Executive Committee is responsible for deciding on the use thereof. This agreement will be valid and in force until the General Shareholders Meeting adopts a new agreement, rendering it invalid, or when all of the shares have been used up.
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Purpose: to keep the management team and Executive Board Directors motivated and loyal through commitments to the Banks growth in the medium- and long-term and creation of long-lasting value for the shareholders. The Plan consists of awarding put options on the Companys shares. Target audience: The Plan will be targeted at: (i) Company Executives who carry out their duties with direct or indirect dependency on the Companys Executive Committee, in the terms that the Board of Directors establishes; and, (ii) Executive Directors. The Plan is voluntary for members. The rights conferred under the Plan are personal and non-transferable. Limit: the maximum number of shares awarded through a put option will be equivalent to 0.5% of the Companys share capital, i.e. 99,036 shares. The delivery of shares will not require payment from the beneficiaries. Exercise price: the exercise price to purchase BANCO GALLEGO, S.A. shares, by virtue of the options granted under the Plan, will be at least the nominal value and at the most the theoretical value with a maximum discount of 100% on the nominal value. Exercise period and conditions: three years after the award date and before five years lapse from that same date. Hedging the Plan: in order to fully or partially hedge future increases in value in the Companys shares, the Company can hedge the Plan using any suitable system or financial instrument that the Board of Directors, or by delegation, the Executive Committee, decides, including shares that make up or might make up its treasury stock or capital increases of ad hoc ordinary and redeemable shares by virtue of authorisation granted by any Shareholders Meeting. Other conditions: only beneficiaries who have a legal relationship with the Company at the time can exercise these options, except in cases of retirement, death, total/absolute permanent incapacity or severe disability and unfair dismissal. Item Ten on the Agenda. Delegation of powers in one person or several people so that they can record the General Meeting resolutions in a public document, in order to file financial statements, issuing the certificate to which article 218 of the Revised Spanish Companies Law refers, with the Chairmans approval. Authorise and empower the Chairman and the Board Secretary of Banco Gallego, S.A., and Jos Carlos Cordero de la Lastra to file the companys financial statements and consolidated financial statements for FY08, in accordance with article 218 of the Revised Spanish Companies Law, 22 December 1989, in accordance with article 329 and following of the Companies Register Regulation, issuing the certificate to which article 218 refers, with the Chairmans approval, and also to empower them, jointly and severally, so that any of them can appear before a notary and record the adopted resolutions in a public document. These powers include the execution of any public and private documents that are necessary, including to correct errors or omissions and adapt their wording to the Registrars statement of validity, until they are registered in the Public or Official Registers.
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E.5.
Give the companys website address and how to access the content on corporate governance.
The companys website address is www.bancogallego.es. The home page includes a tab called The Bank, and if you click on that tab the following is displayed: Corporate Information. Click on this tab to open the following: Shareholders and investors. Click on this tab to open (i) General Shareholders Meeting, (ii) Most important highlights and (iii) Shareholders Office. Corporate Governance. Click on this tab to open the following: (i) Statutes and Board of Directors Financial Information Bulletin Board Press Room MIFID Regulations E.6. State whether the different trade unions, if any, of the holders of shares that the Bank has issued have been held, the purpose of the meetings held during the financial year to which the present report refers, and the percentage of votes with which the resolutions were adopted.
Prior to each General Shareholders Meeting the Bondholder Syndicate Trustee is informed about the points on the agenda and is given the same documentation as the shareholders. The Syndicate Trustee usually attends the General Shareholders Meetings.
Follow-up of good corporate governance recommendations
To report on the level of follow-up of good corporate governance recommendations, the recommendations contained in the Olivencia Report are taken as the basis, which are updated with those included in the Aldama Report. The aim is to consolidate the recommendations contained in both Reports to report as accurately as possible on the follow-up of said recommendations. In keeping with the Banks corporate governance policy, the Banks governance is developed around the following criteria, which are adapted to good governance recommendations in accordance with the comments included below with regard to each of them: Recommendation 1. Board of Directors Duties The Board of Directors must expressly assume the general duty of supervision as its core purpose, carry out the responsibilities involved in this, which it cannot delegate, and establish an official catalogue of the matters reserved for its information. The Board of Directors expressly assumes the general duty of supervision as its core purpose, delegating the Companys normal management to the Management Department.
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Recommendation 2. Board of Directors Independent Status The Board of Directors must be formed by a reasonable number of independent members who are professionals and not related to the executive team or the significant shareholders. In accordance with the Banks current shareholder structure, the Board of Directors is formed by sixteen members at the moment, three of whom are executives, one is independent and the rest are external representative directors. Recommendation 3. Board of Directors Structure Through the members, the Board of Directors must represent the highest percentage of share capital possible. On the Board of Directors the external directors (representative and independent) must represent a large majority over the executives and among the external directors there must be a significant number of independent directors, bearing in mind the companys shareholder structure and the share capital represented on the Board. The Board of Directors represents 92.21% of the share capital. On the current Board of Directors, only three of the members are linked to the Banks executive team. As far as distribution of representative and independent directors, the points mentioned in the previous recommendation apply. Recommendation 4. Board of Directors Size The Board of Directors must have a reasonable number of members to ensure that it operates efficiently and that each director has all of the means necessary to carry out his or her job to the highest level, including communication with the heads of the various business areas and services, and, where necessary, support from external workers and experts. With its current number of members, the Banks Board of Directors is the right size to run efficiently and ensure a sufficient level of participation, being cut from 18 to 16 members during 2007. Recommendation 5. De-concentrated powers If the Board opts for the method whereby the Companys top executive duty falls on the Chairman, it must adopt the necessary precautionary measures to limit the risks of powers being concentrated in one single person. The top executive is the General Manager and there are no accumulated powers. The Chairman and the Deputy Chairman have executive status, and as a result they have permanent general powers conferred to them. The Board of Directors believes that its traditional policy of not giving the Chairman concentrated powers is a fundamental precautionary measure to reduce the risks involved.
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Recommendation 6. Regulatory guarantee Greater importance needs to be given to the figure of the Secretary of the Board of Directors, reinforcing his or her independence and stability and highlighting the function of safeguarding the formal and material legality of the Board of Directors activities. As a person specialising in safeguarding the formal and material legality of the Board of Directors activities, the Secretary of the Board of Directors receives full support from the Board to carry out those duties with complete independence and stability. The duties of overseeing compliance with the Companys principles or corporate governance criteria, properly informing the directors of the matters that fall under their competence and ensuring that the Board meetings run smoothly are also assigned to the Secretary. In accordance with the foregoing, an expert in law who is not related to the Company and who is not a Board member carries out these duties. Recommendation 7. Executive Committee Structure When there is an Executive Committee, its structure must strike the same balance as the Board of Directors as regards the different types of members, and the relationship between both bodies must be based on transparency, in other words, the Board of Directors must be fully informed of the matters discussed and the resolutions adopted at the Committee meetings. The Board of Directors has an Executive Committee formed by the Board Chairman and Deputy Chairman, the General Manager, who acts as the secretary, and four external representative directors (none independent). Recommendation 8. Board of Directors Committees The Board of Directors must have Committees to which control is conferred. These should be formed exclusively by external directors in the fields of reporting and checking of account (Audit); recruiting directors and senior managers (Appointments); establishing and reviewing the remuneration policy (Remuneration); and evaluating the governance system (Compliance). The Board of Directors has an Audit Committee. Recommendation 9. Informing the directors The necessary measures must be adopted to ensure that the directors receive sufficient information, in advance, that has been prepared and targeted specifically with the Board meetings in mind, regardless of the importance or secret nature of the information, except in special circumstances. The directors receive properly prepared and specific information for the Board meetings, at which this is handed out without restrictions except those imposed by law and regulations in force regarding privileged information. The information is given to the directors in advance, and the notice period depends on the specific matter in question. With regards to common matters, such as results, the information is updated continuously. Recommendation 10. Frequency of Board of Directors meetings To ensure the proper running of the Board of Directors, the meetings must be held as often as necessary to fulfil its purpose; the Chairman must encourage all of the members to participate and vote freely; care must be taken over when writing the
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minutes; and the quality and efficiency of the work undertaken must be evaluated at least once a year. The Board of Directors holds ordinary meetings at least once every two months, and holds other special meetings to fulfil its purposes more efficiently. The Chairman has the task of encouraging active participation from all of the directors during debates and ensuring that all of the directors vote freely. The Secretary has the job of writing the minutes in accordance with the principles of clarity, accuracy and completeness of content. The Board of Directors evaluates the quality and efficiency of its work once a year. The results of its analysis are presented at a Board meeting. Recommendation 11. Appointments policy The Boards role in selecting and re-electing its members must be subject to an official, transparent procedure, based on a justified proposal from the Appointments Committee. There is no Appointments Committee. When a director needs to be selected or reelected, the Chairman informs the Board in advance so that it appoints them directly (co-opting) or submits the decision to the General Shareholders Meeting. The selection and appointment procedure is completely transparent. Recommendation 12. Immutability of external directors Once external representative or independent directors have been elected at the General Shareholders Meeting, the Board of Directors should not propose their removal from office until the statutory period for which they were appointed has elapsed, except in special, justified cases that have received approval from the Board of Directors and after the Appointments Committee has issued its report. The duration of the directors office will be five (5) years. Notwithstanding the foregoing, every year the directors post will be submitted to the General Shareholders Meeting for approval. Except in extremely special circumstances, the Board of Directors does not propose the removal of external directors to the General Shareholders Meeting before the end of the statutory period for which they were appointed. Recommendation 13. Resignation from office In the articles of association, companies must include the obligation for directors to resign when they might adversely affect the running of the Board or the companys credit and reputation. The members of the Board of Directors undertake to resign from office at the General Shareholders Meeting when they might adversely affect the running of the Board or the companys credit and reputation should they continue in their job. Recommendation 14. Age of directors The Company must establish a limit on the age of directors and must state this clearly in its internal regulations. The members of the Board of Directors undertake to continue to carry out their job while they still have the same level of capability and availability as when they were elected to their post and to resign when their personal circumstances prevent them from fulfilling this completely. This measure is reinforced by the practice of submitting all of the Board posts to the Companys approval each year.
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Recommendation 15. Suitable reporting and advice Every directors right to collect and receive information and advice required to fulfil his or her supervision duties must be officially acknowledged, and the necessary channels to exercise this right must be established, including referring to external experts in special circumstances. Every director is entitled and obliged to collect and receive information and advice required to fulfil his or her supervision duties, in the broadest terms. Their requests are channelled through the Board Secretary, who will directly give them the information, providing them with contacts with the appropriate partners or introducing measures so that they can perform the necessary studies in situ. Recommendation 16. Director remuneration The director remuneration policy is in keeping with the criteria of moderation, suitability with the companys results and detailed and individualised information. The Remuneration Committee is responsible for proposing, evaluating and reviewing this. The director remuneration policy is in keeping with the companys traditional method, applying the rule of not paying directors other than those who have been conferred executive duties. Remuneration and provisions in the articles of association in their favour are specified in full and individually in the Banks Annual Report and the Annual Corporate Governance Report. The Bank has not established a remuneration system consisting of issuing the Banks shares, share options or any other type of remuneration related to those shares. Recommendation 17. Director loyalty The companys internal regulations must specify the obligations resulting from the directors general duties of diligence and loyalty, including solving conflicts of interests, confidentiality, exploiting business opportunities and use of corporate assets. Banco Gallegos Annual Corporate Governance Report and Internal Regulations on Conduct regarding the securities market specify the obligations resulting from the directors general duties of diligence and loyalty, including solving conflicts of interests, confidentiality, not exploiting business opportunities and use of corporate assets. Recommendation 18. Extending loyalty duties to significant shareholders and senior management The Board of Directors must encourage taking the necessary measures to extend loyalty duties to significant shareholders, especially precautionary measures for transactions between them and the company.
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The Board of Directors encourages taking the necessary measures to extend the same loyalty duties to significant shareholders, whether members of the Board or not, and to the Banks senior management, submitting transactions between them and the Company to the highest levels of transparency and control. Recommendation 19. General Shareholders Meeting When holding General Shareholders Meetings and once they have been convened, the Company must provide information about the complete contents of all of the resolution proposals that are going to be submitted at the Meeting, using the website for this purpose, regardless of any other legal or voluntary procedure that the Company has. The convened General Meetings will be announced through the corporate website, including the complete contents of all of the resolution proposals that are going to be submitted at the Meeting for adoption and all of the documentation related to the proposals (annual accounts, administrator reports if necessary, etc). Also, after the General Shareholders Meeting has been held, the markets are informed by publishing an important highlight and the resolutions adopted at the last General Shareholders Meeting that was held are announced on the website. Recommendation 20. General Meeting and Board of Directors Regulations Every company must have a set of corporate governance rules or criteria including, at least, the General Meeting and Board of Directors Regulations. The Bank does not have Board of Directors Regulations or General Meeting Regulations. The provisions in the Articles of Association and under Law apply, which are considered sufficient due to the representation of share capital at the Meetings and on the Board of Directors. Recommendation 21. Transparency of information Measures aimed at making the vote delegation system more transparent and encouraging communication from the company to its shareholders, especially institutional investors, must be introduced. The Board keeps the vote delegation system and the Companys communication with all of its shareholders transparent, which have always been the Banks policy. Shareholders can also find information about the Banks evolution through the Shareholders Offices or the corporate website. Recommendation 22. Scope of information Apart from regulatory requirements in force, the Board of Directors is responsible for supplying markets with quick, accurate and reliable information, especially with regard to the shareholder structure, significant changes to governance rules, important related transactions and treasury stock.
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The Board of Directors supplies markets quick, accurate and reliable information with regard to the shareholder structure, significant changes to governance rules and important related transactions. Recommendation 23. Corporate governance reporting Reporting duties regarding each companys structure and governance practices must be applied, and measures must be adopted to ensure the highest quality of the information, being included in a single document that is published for shareholders and investors. This Annual Report complies with the above. As mentioned herein, the Bank is going to wait for the single document under Order ECO/3722/2,003, 26 December, to be written. Recommendation 24. Regular financial information All of the regular financial information, and annual information, given to the markets must be prepared in accordance with the same principles and standards as the annual accounts and before it is published the Audit Committee must check it. Regular financial information, and annual information, is given to the markets in accordance with the same principles and standards as the annual accounts and before it is published the Audit Committee checks it. Recommendation 25. Information via Internet There must be a website through which all of the shareholders, investors and market in general can be informed about the financial highlights and significant information in relation to the Company, and allow the shareholders to exercise their right to information and other corporate rights, where applicable. The Bank has an institutional website, www.bancogallego.es, which contains the Companys financial information and information about every subject related to the Banks corporate purpose. Here you can check the annual reports for the last few years and the important highlights reported to markets in recent years. Finally, as mentioned in recommendation 19, the General Meeting announcements and information contained in them, resolution proposals submitted at the meetings and the resolutions finally adopted can be consulted here. Recommendation 26. External auditors independent status The Board of Directors and the Audit Committee must oversee situations that could represent a risk for the independent status of the companys external auditors and, specifically, they must check the percentage that the fees paid for all of the services represent regarding the auditor companys total income, and that those relating to professional services other than audits are made public.
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During FY09, the Banks Board of Directors and Audit Committee supervised the independent status of the external auditors through different channels. The Committee has requested that the heads of audit of the Banks companies attend several of its meetings. This has made it possible to check that the remuneration paid to the Banks external auditors and the Groups companies, for every service rendered, does not represent a significant percentage and, in any case, less than 10% of the audit companys total income, which is one of the leading audit companies in the world. It has also been checked that the fees for regular or usual professional services other than audits paid to experts or companies related directly or indirectly to the audit company do not reach a significant level and never affect the Banks strategy or general plan. Recommendation 27. Accounting standards The Board of Directors makes an effort to avoid that the accounts that it prepares are submitted to the General Shareholders Meeting with reservations and qualifications in the audit report, and that, when this is not possible, the Board and the auditors clearly explain the content and scope of the discrepancies to the shareholders and markets. The Board of Directors, itself and through the Audit Committee, ensures that the accounts it prepares are submitted to the General Shareholders Meeting without reservations and qualifications in the audit report. During joint meetings with external auditors a request to thoroughly check several areas of the accounts to assess the standard of the work undertaken was made. Recommendation 28. Continuity The Board of Directors must include information about its governance rules in its annual public report, justifying those that do not fulfil the recommendations under this Code. The Board of Directors undertakes to prepare an annual corporate governance report.
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G Other important information

If it is considered that the company applies other relevant principles or aspects relating to corporate governance practices that have not been covered in this report, they should be mentioned below with an explanation of their content. Any other information, clarification or nuance relating to the foregoing sections of the report, to the extent that it is relevant and not repetitive, can be included in this section. In particular, state whether or not the company is subject to legislation other than Spanish legislation on the subject of corporate governance and, when applicable, include any information that it is under the obligation of supplying and that differs from that required in this report. As further information to point B.1.4., the commitments accrued for pensions with members of the Banks Board of Directors (working or retired) amounts to 7,945 thousand. As further information to point B.1.5., the commitments accrued for pensions with related people amounts to 4,089 thousand. As clarification regarding point C.1, the overall amount of direct and indirect risks that the Bank awarded to significant shareholders as at 31 December 2009 totals 65,721 thousand, of which 53,954 thousand are for credits and loans, and 11,767 thousand for guarantees. As clarification regarding point C.2, the overall amount of risks with administrators as at 31 December 2009 totals 74,384 thousand, of which 63,693 thousand are for credits and loans, and 10,273 thousand for guarantees.
This annual corporate governance report was approved by the Companys Board of Directors at its meeting held on -04-02-2010. State the Directors who voted against or abstained from voting in relating with the approval of this Report. None.
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Further information
CHAIRMAN
Juan Manuel Urgoiti Lpez-Ocaa
DEPUTY CHAIRMAN
Julio Fernndez Gayoso
DIRECTORS
Antonio Abril Abadn Ramn Bahamonde Santiso Epifanio Campo Fernndez Saturnino Cuquejo Iglesias Ignacio Santillana del Barrio lvaro Urgoiti Gutirrez Javier Ungra Lpez scar Rodrguez Estrada Gregorio Gorriarn Laza ngel Lpez-Corona Davila Jos Luis Losada Rodrguez Isaac Alberto Mguez Lourido Jos Luis Pego Alonso Ramiro Mato Garca Ansorena
BOARD SECRETARY
ngel Varela Varas
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EXECUTIVE DIRECTOR AND GENERAL MANAGER

Jos Luis Losada Rodrguez
SENIOR MANAGERS
Deputy General Manager: Fernando Ortega Cmbara Commercial Banking Department: Manuel Prol Cid Finance and Corporate Development Department: Joaqun Espallargas Iberni Media Department: Javier Alonso Muoz Risks Department: Isaac Snchez Monge Technical and Control Department: Jos Carlos Cordero de la Lastra
FURTHER INFORMATION
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Banco Gallego, S.A., with registered address at Calle Hrreo number 38, formerly Banco 21, S.A., which later took over Banco Gallego, S.A. and adopted the name of the merged Bank (1998), was incorporated on 13 May 1991. It activities commenced on 16 December of the same year and it is registered in the Companies House of Santiago de Compostela, volume 2,141, folio 1, page SC-22011, 1st entry. The Company has unlimited duration, in accordance with article 4 of the Articles of Association. Banco Gallego, S.A. is registered in the Banks and Bankers Spanish Registry, under number 46, and Tax Identification Number A80042112. The updated Articles of Association of Banco Gallego, S.A. can be examined at the Companies House of Santiago de Compostela and at the General Secretarys Office located at the registered address. The purpose of the company is to carry out the common legally authorised banking activities, both in Spain and in foreign countries, as established in Article 2 of the articles of Association. The dates and calls for Ordinary and Extraordinary General Meetings to be attended by the shareholders that individually hold at least 500 shares are covered by Articles 24 to 36 of the Articles of Association. In accordance with Article 39 of the abovementioned Articles of Association, the representation of Banco Gallego, S.A., corresponds to the Board of Directors. Banco Gallego, S.A. is a member of the Bank Insurance Fund (FGD) and of the Association of Spanish Private Banks (AEB).
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Province A Corua A Corua O.P . A Corua, Ag. 1 A Corua, Ag. 3 A Corua, Ag. 4 A Corua, Ag. 5 A Corua, Ag. 8 A Corua, Ag. 9 A Corua, Ag. 10 A Picota-Mazaricos Arca-O Pino Arteixo Arzua As Pontes de Garca Rodrguez Banca Premier A Corua Banca Premier Santiago Bembibre-Val do Dubra Bertamirns-Ames Betanzos Boiro Camarias Cambre Camporrapado-Boqueixon Carballo Carnota Carral Cedeira Cee Esteiro-Muros Fene Ferrol O.P . Ferrol, Ag. 1 Malpica de Bergantios Meicende-Arteixo Melide Mio Muros de San Pedro Naron Negreira Noia
Address
Telephone number 981 12 79 41 981 26 03 50 981 23 71 23 981 17 44 97 981 21 15 00 981 14 81 21 981 25 11 25 981 17 55 34 981 85 20 16 981 51 10 26 981 60 08 21 981 50 00 38 981 45 01 50 981 12 79 53 981 56 90 15 981 88 90 08 981 88 30 00 981 77 64 23 981 84 80 31 981 73 60 55 981 67 56 07 981 51 42 00 981 70 04 51 981 85 70 46 981 67 02 55 981 48 01 50 981 74 69 68 981 76 37 53 981 34 40 65 981 35 15 97 981 37 08 61 981 72 02 11 981 27 52 58 981 50 52 50 981 78 32 00 981 82 60 00 981 39 30 24 981 88 53 00 981 82 05 16
Linares Rivas, 30 Villa de Negreira, 53 Ronda de Outeiro, 164 Concepcin Arenal, 19 Avda. de Hrcules, 73 Argentina, 1 y 3 Avda. de Rubine, 4 Ctra. de Mesoiro, 91 Avda. 13 de Abril, 52 Avda. de Lugo, 9 Avda. Fisterra, 185 Ramon Franco, 4 Avda. de Galicia, 79 Avda. Linares Rivas, 33-34, 1 Senra, 7-9 Corredoira, 7 Avda. de la Maha, 3 U Avda. Jess Garca Naveira, 9 Avda. de la Constitucin, 45 Plaza del ngel, 5 Pumar Mndez, 6 Camporrapado, 5 Coln, 3 Avda. de Jos Antonio, 1 Avda. dos Mrtires, 17 Avda. da Area, 1 Domingo A. de Andrade, 6 Ribera de Mayo, s/n Avda. del Marqus de Figueroa, 18 Mara, 66 Ctra. de Castilla, 138-140 Plaza de Villar Amigo, 6 Meicende, 168 General Franco, 13 Avda. Jos Antonio, 4 Avda. de Castelao, 15 Ctra. de Castilla, 270 Cachurra, 35 Escultor Ferreiro, 12
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Province O Milladoiro-Ames Ordes Ortigueira Padrn Pino do Val-Mazaricos Ponteceso Pontedeume Portomouro-Val do Dubra Ramallosa-Teo Ribeira Sada Santa Cruz de Oleiros Santiago O.P . Santiago, Ag. 1 Santiago, Ag. 2 Santiago, Ag. 3 Santiago, Ag. 4 Santiago, Ag. 6 Serra de Outes Sigeiro-Oroso Touro Urdilde-Rois Viao Pequeo-Trazo Lugo A Fonsagrada Becerre Burela Castro de Ribeiras de Lea Chantada Ferreira do Valadouro Foz Guitiriz Lugo O.P . Lugo, Ag. 1 Lugo, Ag. 3 Mondoedo Monforte de Lemos Pedrafita do Cebreiro Ribadeo
Address
Telephone number 981 53 05 40 981 68 08 50 981 40 08 25 981 81 12 00 981 85 62 13 981 71 43 25 981 43 04 00 981 88 26 96 981 80 90 55 981 87 01 44 981 61 90 75 981 61 47 25 981 58 10 00 981 56 87 18 981 59 88 00 981 58 63 03 981 59 72 12 981 56 22 29 981 85 00 67 981 69 14 43 981 50 40 34 981 80 51 46 981 68 90 11
Avda. Rosala de Castro, 53 Alfonso Senra, 122 General Franco,62 Ctra. General, 10 Avda. Pedro Val, 16 Avda. Eduardo Pondal, 8 Santiago, 18 Ctra. Santiago-Carballo, s/n Ramallosa, 18 General Franco, 7 Linares Rivas, 18-20 Concepcin Arenal, 4 Hrreo, 38 Preguntoiro, 14 Plaza de Vigo, 2 Rua do Cruceiro da Corua, 58 Rua Castieirio, 9 Rodrguez de Viguri, 3 General Franco, 7 Avda. de Compostela, 24 Ra Bispo Diguez Reboredo, 15 Urdilde, s/n Viao Pequeo, 57
Rosala de Castro, 24 Eulogio Rosn, 2 Avda. Arcadio Pardias, 113 Avda. Terra Cha, 44 Juan XXIII, 14 Plaza de Santa Mara, 10 Avda. Marina, 34 General Franco, 15 Bolao Rivadeneira, 1 San Roque, 142 Avda. de A Corua, 326 Progreso, 12 Avda. de Galicia, 40 Ctra. Gral. Madrid-Corua, 26 Rodrguez Murias, 24
982 34 00 12 982 36 02 85 982 58 58 76 982 31 01 08 982 44 04 51 982 57 42 32 982 14 06 50 982 37 02 31 982 28 47 00 982 24 11 36 982 21 40 25 982 52 17 01 982 40 16 00 982 36 71 40 982 12 80 50
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Province Sarria Vilalba Viveiro Ourense A Merca A Peroxa Allariz Cimadevila - Barbads Fes - Bobors Moreiras - Ton O Barco de Valdeorras O Carballio Ourense O.P . Ourense, Ag. 1 Ourense, Ag. 3 Outomuro Pobra de Trives Ribadavia San Cibrao das Vias Vern Xinzo de Limia Pontevedra A Estrada A Guarda Aldn Baiona Banca Premier Pontevedra Banca Premier Vigo Caldas de Reis Caleiro-Vilanova Cambados Cangas de Morrazo Cuntis Forcarei Laln Marn Moaa O Grove
Address Calvo Sotelo, 114 Avda. Plcido Pea Novo, 21 Avda. Benito Galcern, 6-bajo
Telephone number 982 53 06 00 982 51 03 87 982 56 02 44
Pl. Francisco Pizarro, 39 Ctra. General, s/n Emilia Pardo Bazn, 36 Cimadevila, s/n Costias, s/n A Carreteira, 91 Marcelino Surez, 7 Martnez Avellanosa, 3 Avda. Juan XXIII, 21 Pea Trevinca, 11 Ervedelo, 41 Ctra. Celanova-Barral, 49 Praza Maior, 4 Rua do Ribeiro, 11 Calle Principal, 66 Luis Espada, 57 Avda. de Madrid, 29
988 26 00 77 988 20 66 15 988 44 01 13 988 36 00 46 988 28 50 04 988 26 20 07 988 32 53 48 988 27 08 50 988 21 05 48 988 22 82 90 988 24 83 02 988 49 11 30 988 33 09 97 988 47 07 25 988 38 10 66 988 41 01 75 988 46 24 59
Calvo Sotelo, 24 Bouzo, 3 Pieiro, 33 Ciudad de Vigo, 4 Cobin Roffignac, 2 Policarpo Sanz, 36-38 2 Real, 45 Caleiro, 82 Avda. de Galicia, 3 Eduardo Vincenti, 8 Bernardo Sagasta, 17 Progreso, 13 Rua Principal, 25 Doctor Tourio, 2 Concepcin Arenal, 114 Pablo Iglesias, 4
986 57 01 76 986 61 03 75 986 32 92 65 986 35 53 00 886 21 40 10 986 11 33 05 986 54 02 27 986 55 45 90 986 54 31 42 986 30 11 50 986 54 80 42 986 75 41 00 986 78 04 00 986 88 20 00 986 31 35 11 986 73 11 10
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Province O Porrio Petelos-Mos Poio Ponteareas Pontevedra O.P . Pontevedra, Ag. 1 Pontevedra, Ag. 2 Redondela Sanxenxo Tui Vigo O.P . Vigo, Ag. 1 Vigo, Ag. 3 Vigo, Ag. 8 Vigo, Ag. 9 Vilagarca de Arousa Villalonga Madrid Banca Premier Cea Bermdez Banca Premier Henri Dunant Banca Premier Prncipe Vergara Banca Premier Velzquez Madrid, O.P . Madrid Ag. 2 Madrid Ag. 3 Madrid Ag. 4 Madrid Ag. 5 Madrid Ag. 6 Madrid Ag. 7 Madrid Ag. 8 Madrid Ag. 9 Madrid Ag. 10 Madrid Ag. 11 Madrid Ag. 13 Madrid Ag. 14 Madrid Ag. 15
Address Ramn Gonzlez, 51 Petelos, 17 San Juan Casal, 10 Avda. de Elduayen, 2 Riestra, 3 Real, 35 Doctor Loureiro Crespo, 1 Alfonso XII, 32 Plaza do Pazo, 8 Alcalde Casal Aboy, 2 Coln, 20 Avda. Florida, 6 Brasil, 11 Gregorio Espino, 3 Corua, 23 Plaza de Galicia, 10 Avenida do Cruceiro, 11
Telephone number 986 33 73 12 986 33 08 82 986 77 03 43 986 64 03 02 986 85 57 50 986 85 83 00 986 85 63 53 986 40 99 34 986 72 70 51 986 60 03 51 986 22 85 00 986 29 28 08 986 42 55 70 986 27 84 27 986 29 41 66 986 50 00 71 986 74 41 86
Cea Bermdez, 44 Henri Dunant, 17 Prncipe de Vergara, 133 Velzquez, 96 Alberto Alcocer, 8 Velzquez, 75 Alcal, 109 Paseo de la Habana, 4 Paseo General Martnez Campos, 2 Pza. Repblica Ecuador, 5 Avda. Europa, 13-15 (Alcobendas) Francisco Gervs, 14 Avda. de Bruselas, 54 Diego de Len, 5 Carranza, 5 Avda. Felipe II, 4 Paseo de las Acacias, 31 Paseo de Extremadura, 113
91 535 91 71 91 353 33 41 91 590 13 24 91 781 77 64 91 458 57 18 91 431 07 05 91 578 25 29 91 564 32 03 91 310 79 45 91 457 41 49 91 661 78 14 91 571 54 74 91 724 08 35 91 745 42 90 91 444 13 00 91 426 39 00 91 539 46 90 91 526 79 04
218
FURTHER INFORMATION
2009 ANNUAL REPORT
Province Madrid Ag. 16 Madrid Ag. 17 Madrid Ag. 18 Madrid Ag. 19 Madrid Ag. 22 Madrid Ag. 24 Madrid Ag. 25 Madrid Ag. 27 Madrid Ag. 28 Madrid Ag. 30 Madrid Ag. 31 lava Vitoria O.P . Albacete Albacete O.P . Alicante Alicante O.P . Jvea Almera Almera O.P . Asturias Avils Gijn Oviedo O.P . Barcelona Banca Premier Barcelona Barcelona O.P . Barcelona Ag. 1 Burgos Burgos O.P .
Address
Telephone number 91 724 08 50 91 565 58 60 91 750 15 82 91 500 80 90 91 509 54 10 91 659 37 00 91 614 67 10 91 384 41 18 91 416 76 59 91 535 79 70 91 511 84 97
Alcal, 230 General Ricardos, 2 Archiduque Alberto, 19-23 Avenida de la Albufera, 53 Jos de Cadalso, 64 (Aluche) Po XII, 1 (San Sebastin de los Reyes) Avda. Dos de Mayo, 23 (Mstoles) Caleruega, 39 Lpez de Hoyos, 155 Reina de las Mercedes, 9 Avda. de la Peseta, 76-82 (Carabanchel)
Postas, 37
945 26 81 33
Martnez Villena, 17-19
967 19 10 73
Reyes Catlicos, 18 Avda. Amanecer de Espaa, 5
965 13 55 62 966 46 13 94
Federico Garca Lorca, 47
950 62 05 07
Emile Robn, 1 Plaza de Europa, 17 Fruela, 12
985 56 05 48 985 17 59 74 985 20 98 60
Tenor Vias, 4-6 Avda. Diagonal, 428 Avda. Diagonal, 160
93 241 80 63 93 237 98 64 93 303 00 17
Avda. de la Paz, 24
947 25 23 90
FURTHER INFORMATION
219
Province Castelln Castelln O.P . Crdoba Crdoba O.P . Granada Granada O.P . Guadalajara Guadalajara O.P . Guipzcoa San Sebastin O.P . La Rioja Logroo O.P . Len Len O.P . Murcia Murcia O.P . Navarra Pamplona O.P . Palencia Palencia O.P . Palma de Mallorca Palma de Mallorca O.P . Salamanca Salamanca O.P .
Address Herrero, 6
Telephone number 964 23 40 52
Paseo de la Victoria, 21
957 76 08 24
Gran Va de Coln, 40
958 27 44 71
Virgen del Amparo, 7
949 24 82 74
Avda. de los Fueros, 1
943 43 07 72
Avda. de Portugal, 2
941 28 90 23
Plaza San Marcelo, s/n
987 87 65 82
Ronda de Levante, 4
968 23 27 00
Emilio Arrieta, 6
948 20 30 60
Plaza de Abilio Caldern, s/n
979 70 64 89
Avenida Conde Sallent, 11
971 72 60 66
Avda. de Mirat, 26
923 28 36 94
220
FURTHER INFORMATION
2009 ANNUAL REPORT
Province Santander Santander O.P . Sevilla Sevilla O.P . Tarragona Tarragona O.P . Toledo Toledo O.P . Valencia Valencia O.P . Valencia, Ag. 1 Valladolid Valladolid O.P . Arroyo de La Encomienda- La Flecha Vizcaya Bilbao O.P . Barakaldo Getxo (Las Arenas) Zaragoza Zaragoza O.P . Zaragoza Ag. 1
Address General Mola, 23
Telephone number 942 31 93 92
Marqus de Paradas, 53
954 29 33 82
La Uni, 29
977 25 21 15
Avda. de Europa, 12
925 23 94 63
Pintor Sorolla, 35 Avda. de las Cortes, 8
96 310 62 27 96 346 15 95
Duque de la Victoria, 3 Plaza de Espaa, 5
983 36 22 50 983 40 67 04
Elcano, 14 Avda. de la Libertad, 9 Zubiko Emparantza, 1
944 70 01 70 944 18 05 32 944 80 62 85
Len XIII, 5 Juan Pablo II, 22
976 48 26 10 976 75 89 64
FURTHER INFORMATION
221
REFLECTIONS
Water, colourless, becomes a palette of infinite colours when light filters through it. A simple wave, serene and luminous, generates hundreds of images for the sensitive eye. When a camera freezes that moment, it turns it into a unique, impressionist work of art, such as this group of pictures that the creators have suggestively captured. The reflections of water, a basic element of life, thus become a vehicle of expression revealing all of its aesthetic potential. The liquid element morphs into light, into movement, and into art.
Creator: Holly Kuchera
222
FURTHER INFORMATION
2009 ANNUAL REPORT
Creator: JoLin
Creator: Lidian
Creator: Palis Michalis
Creator: JoLin
Creator: Bruce Rolff
Creator: Abraham Badenhorst
Creator: JoLin
Creator: JoLin
Creator: Vicky German
Creator: William Attard McCarthy
Creator: Bernd Jrgens
Creator: Rui Saraiva
Creator: Jeanne Hatch
Creator: Diego Cervo
Creator: Ludmila Yilmaz
FURTHER INFORMATION
223
Design, formatting and printing: www.cege.es Zurbano, 45. 28010 Madrid. D.L.: M-15895-2010 Translation: Adhara Traducciones SL, www.adharatrad.com adhara@adharatrad.com

Annual Report 2009 Banco Gallego

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Annual Report 2009 Banco Gallego

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2009 ANNUAL REPORT

2009 ANNUAL REPORT

2009 ANNUAL REPORT

37 43 175 179 211

Letter from the Chairman

LETTER FROM THE CHAIRMAN

2009 ANNUAL REPORT

Juan Manuel Urgoiti

LETTER FROM THE CHAIRMAN

2009 ANNUAL REPORT

Gross loans and receivables

In thousands of euros 3,199,976 3,472,690

In thousands of euros 7,657,957 6,481,639 7,313,348

Profit after tax for the year

2009 Management Report

Variation 2009/2008 2009

2009 MANAGEMENT REPORT

2009 ANNUAL REPORT

Evolution of capital and reserves

100,000 83,440 50,000 83,440 83,440

0 2005 2006 2007 2008 2009

AVERAGE TOTAL ASSETS

2009 MANAGEMENT REPORT

Evolution of average total assets

In thousands of euros 7,657,957 7,313,348 6,481,639 7,970,440

2009 MANAGEMENT REPORT

2009 ANNUAL REPORT

Balance sheet total

In thousands of euros 4,266,322 3,941,837 4,223,635

Evolution of Balance sheet total ratios

In thousands of euros 20,913 20,806 4,474

5,000 4,750 4,500

2009 MANAGEMENT REPORT

Total customer funds

Total managed funds

2009 MANAGEMENT REPORT

2009 ANNUAL REPORT

Total managed funds

2009 MANAGEMENT REPORT

Evolution of managed customer funds

Current accounts 503,813 12.55%

Other financial instruments 327,955 8.17%

Classification percentages by amounts of customer deposits in euros

LOANS AND RECEIVABLES

2009 MANAGEMENT REPORT

2009 ANNUAL REPORT

Evolution of typical loans and receivables

3,456,650 3,199,976 2,676,717 2,080,170

2,000,000 1,500,000 1,000,000 500,000 0 2005 2006 2007 2008 2008

Net loans and receivables

Gross loans and receivables

Net loans and receivables

2009 MANAGEMENT REPORT

Credits and loans 804,372 23.16%

2009 MANAGEMENT REPORT

2009 ANNUAL REPORT

Allocation by purpose of loans used to finance production activities -resident sector

Other services 19.85%

Agriculture, livestock and fishing 2.78% Food and drinks 2.48%

83,055 79,122 64,732

2009 MANAGEMENT REPORT

OPERATIONAL AREAS Technology and processes

2009 MANAGEMENT REPORT