Spain 2010

What are the markets waiting for?

Marisa Mazo, CFA

Head of Strategy & Research
mlmazo@ahorro.com
June,, 2010

Ahorro Corporación Financiera, S.V., S.A. See important disclosure on the last two pages of this document
 June, 2010

Index

` Spain: The recession continues

` Spain, at a glance.
` Worst is
i over but...
b
` Main problems (and challenges) of the Spanish economy.
` External sector: restoring competitiveness a must.
` Employment.:
Employment : waiting for labour market reform
reform.
` Budget deficit: additional measures in the pipeline?
` Suffering from public debt.
` The real estate sector: have we touched bottom?
bottom?.
` The financial sector.
` Annex.

Ahorro Corporación Financiera, S.V., S.A. 2

 June, 2010

Spain
p ((I):
) Recession continues in 2010.

` Spanish GDP may decline by –0.9% in 2010e, after the –3.6% drop in 2009. Positive rates are expected 2011e
onwards. However,
` Will the tightening financial market conditions prevent Spain
Spain’s
s economic recovery?
` The new problems:
` Unemployment rate: 20.8% by 2011e.
` Budget
g deficit: –9.8% in 2010e.
` The everlasting weaknesses:
` Current account deficit: how to reduce it to under –4.0%?
` Excessive reliance on the residential construction sector: despite the crisis, still c. 6.0% of GDP in 2010e.
` Restoring competitiveness: “THE” challenge
` Are politicians willing to implement structural reforms?
` Short-term reforms:
` Reduce companies’ overall taxation
` Labour reform
` Medium-term reforms:
` Energy sector.
` Distribution of competences among the different public administrations.

Ahorro Corporación Financiera, S.V., S.A. 3

 June, 2010

Spain,
p at a g
glance

` 2010e GDP may decline by –0.9% in 2010e, after the –3.6% drop in 2009e.
` Domestic demand still negative: –1.8% in 2010e.
` Falling
lli externall demand
d d contribution:
ib i +1.0%
0% in
i 2010e.
20 0
` Positive GDP growth rates expected from 2011e onwards: we estimate a mere +0.5% increase.
` Government’s forecasts have been cut to: –0.3% in 2010e, +1.3% in 2011e, +2.5% in 2012e and +2.7% in 2013e (–0.3% in
2010e,, +1.8% in 2011e,, +2.9% in 2012e and +3.1% in 2013e previously).
p y)

Spain: Macroeconomic scenario

(%) 2003 2004 2005 2006 2007 2008 2009 2010e 2011e
GDP 3.1 3.3 3.6 4.0 3.6 0.9 -3.6 -0.9 0.5
Private consumption 2.9 4.2 4.2 3.8 3.6 -0.6 -4.9 -0.2 0.5
Public spending 4.8 6.3 5.5 4.6 5.5 5.4 3.8 0.1 -2.5
Gross fixed capital investment 5.9 5.1 7.0 7.2 4.6 -4.4 -15.3 -6.0 -1.5
Equipment investment 4.1 5.1 9.2 9.9 9.0 -1.8 -23.1 -1.8 3.1
Construction 62
6.2 54
5.4 61
6.1 60
6.0 32
3.2 -5 5
-5.5 -11 2
-11.2 -10 6
-10.6 -6 2
-6.2
Residential 9.3 5.9 6.1 6.2 3.0 -10.3 -24.5 -17.6 -7.3
Other construction 3.5 5.0 6.2 5.8 3.3 -0.4 1.6 -3.8 -4.9
National demand 3.8 4.8 5.1 5.2 4.2 -0.5 -6.4 -1.8 -0.6
External demand -0.7 -1.5 -1.5 -1.2 -0.6 1.4 2.8 1.0 1.0
Exports 3.7 4.2 2.5 6.7 6.6 -1.0 -11.5 6.2 7.0
Imports 6.2 9.6 7.7 10.2 8.0 -4.9 -17.9 2.3 2.7

CPI 3.0 3.0 3.4 3.5 2.8 4.1 -0.3 1.5 1.7
Unemployment rate (average) 11.5 11.0 9.2 8.5 8.3 11.3 18.0 20.4 20.8
Budget surplus/(deficit) as % of GDP -0.2 -0.3 1.0 2.0 1.9 -4.1 -11.2 -9.8 -7.1
Current account balance as % of GDP -3.5 -5.3 -7.4 -9.0 -10.0 -9.6 -5.1 -4.3 -4.0
Source: INE and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 4

 June, 2010

Worst is over, but...

` The sharpest drop in GDP already seen: –4.2% in 2Q09 vs. –1.3% in 1Q10.
` Consumer confidence has recovered to 65.1 in May, 2010 from the minimum 48.6 in Feb., 2009.
` Industrial
d i l confidence
fid has
h risen
i to –14.3
3 iin May, 20
2010
0 from
f –40.0
0 0 (similar
( i il llevell than
h ini the
h 1993
993 crisis)
i i ) in
i Mar., 2009.
2009
` Retail sales: -12.6% in Feb., 2009 vs. +0.2% in Apr., 2010.
` Industrial production: –28.4% in Apr., 2009 vs. +3.0% in Apr., 2010.
` Electricity consumption: –11.8%
11 8% in Apr.,
Apr 2009 vs.
vs +4.9%
+4 9% in May,
May 2010.
2010
` Hotel occupancy (overnight stays): –18.9% in Mar., 2009 vs. +1.1% in Apr., 2010.

Spain: Consumer and manufacturing confidence Spain: Real economy data

120 10 20

5 15
100 0 10

-5 5
80
-10 0

-15 -5
(%)

60 (%)

(%)
-20 -10
-25 -15
40
-30
30 -20

20 -35 -25
-40 -30
0 -45 -35
Sepp-04
Jann-05
Mayy-05
Sepp-05
Jann-06
Mayy-06
Sepp-06
Jann-07
Mayy-07
Sepp-07
Jann-08
Mayy-08
Sepp-08
Jann-09
Mayy-09
Sepp-09
Jann-10
Mayy-10

Sep-04

Jan-05

Mayy-05

Sep-05

Jan-06

Mayy-06

Sep-06

Jan-07

Mayy-07

Sep-07

Jan-08

Mayy-08

Sep-08

Jan-09

Mayy-09

Sep-09

Jan-10

Mayy-10
Consumer confidence (LHS) Manufacturing confidence (RHS) Retail sales Industrial production Overnights in hotels Electricity consumption

Source: ICO, European Commission and ACF Research Source: INE and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 5

 June, 2010

... g
growth p
potential eroded

` Spain’s economic growth potential has dropped to 1.0% in 2010e, from 2.6% in 2008, due to the fall in investment and the
increase in the structural unemployment rate (NAIRU).
` Prior average rates, above 3.0%, are not expected in the medium term.
` Productivity should improve, contributing positively to potential growth, reflecting the shift from construction (labour
intensive) to other less labour-intensive sectors.
` Structural reforms are needed to enhance potential GDP.

Potential GDP growth Output gap

4.0 8.0
3.5 6.0
3.5 3.3
4.0
3.0 2.9
26
2.6 20
2.0
2.5
0.0

(%)
(%)

2.0 -2.0

1.5 -4.0
1.5
1.0 -6.0
1.0
-8.0
0.5 -10.0

0.0 -12.0 1992

1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1987-96 1997-06 2007 2008 2009e 2010e
France Germany Spain Eurozone USA Japan Spain France Germany Italy UK US Euro area

Source: OCDE and ACF Research Source: OCDE and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 6

 June, 2010

Main p
problems ((and challenges)
g ) in 2010e onwards.

` The main threats that the Spanish economy was facing in 2007 are now our main problems:
` The high current account deficit and, consequently, massive external financing needs.
` Although
lh h diminishing,
di i i hi it
i may still
ill represent some 3.0%-4.0%
3 0% 0% off GDP,
G medium
di term.
` Net external investment position already accounts for –91% of GDP.
` Key challenge: restore the competitiveness of Spanish companies.
` Excessive dependence on the residential construction sector
sector.
` In spite of the crisis, the sector still represents c. 6.0% of GDP in 2010e.
` Key challenge: the stabilisation of the sector at a sustainable “cruising speed”.
` Employment dynamics: from the highest job-creation economy to the largest job destroyer.
destroyer
` 0.27Mn jobs to be destroyed in 2010e, totalling, c. 2.0Mn since 2008. Unemployment rate may reach 20.8% in 2011e.
` The dual economy: the employed (fixed contracts) and the unemployed (temporary labour contracts).
` Key challenge: reform of the labour market.
` Budget deficit: from a 2.3% surplus in 2007 to a -9.8% deficit in 2010e (-11.2% in 2009).
` Public debt would represent 66% of GDP in 2010e vs. 36% in 2007. Risk of ratings downgrades.
` Key
y challenge:
g looking
g for sustainability.
y
` Are politicians willing to implement structural reforms?

Ahorro Corporación Financiera, S.V., S.A. 7

 June, 2010

Spanish
p medium-term challenges
g

` Restoring competitiveness to reduce external leverage is the main challenge that the Spanish economy is facing:
` We lack the devaluation option.
` Feasible
ibl measures:
` Short term: reduce the corporate tax or the employer social security contribution and control labour costs.
` Medium term: structural changes (energy, service sector, R&D, education).

Unit labour costs: International comparison Taxes: International comparison

(%) (%)

14 45
Empoy er social security contribution
12 US Japan 40
EUM Germany VAT
10 35
Spain Corporate tax rate
8
30
6
25
4
2 20
0 15
-2 10
-4
5
-6
0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

Poortugal
Ireland
Spain

Poland
Austria

Netherlands
Beelgium

Finland

Greece

Italy

UK
Huungary
France

weden
Gerrmany

Sw
A

P
G
F
F
Source: Eurostat, and ACF Research Source: Eurostat and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 8

 June, 2010

External sector ((I):

) Current account deficit

` The current account deficit may narrow to –4.3% and –4.0% of GDP in 2010e and 2011e, respectively, from –5.4% in 2009
and a maximum of –10.0% in 2007.
` Trade balance improved to –4.3%
4.3% of GDP in 2009 (from –8.1%
8.1% in 2008) due to lower oil prices (energy products balance
reduced to –2.2% in 2009 from –4.2% in 2008).
` Tourism net balance reduced by –6.6% in 2009 or 2.5% of GDP.
` Key challenge: restore competitiveness of Spanish companies.
` Which products or services would help Spain balance its external accounts?

Spain: Balance of payments Spain: Trade balance

60
6.0
4.0
4.0
2.0
2.0
0.0
0.0 -0.3 -0.2 -0.1
-1.1
1.1 -1.3
-1 3 -11.22
-2.0
20 -2.6
26 -1.44 -1.5
-1
-2.0 -3.3 -3.7 -3.2 -3.2

(as % of GDP)
-3.8 -3.4 -3.4
-2.9 -3.3 -3.5 -3.6 -3.5 -3.3 -3.8 -3.9 -3.6 -3.5 -2.2 -2.4
-3.7 -3.8 -3.7 -4.0 -3.9 -1.5 -3.7
(%)

-4.0 -4.0
-1.5 -1.4 -1.5 -3.4 -3.7 -3.8
-5.3 -5.4 -5.0 -1.4
-1.4 -1.0 -2.2 -2.0
-6.0 -6.0 -1.6 -1.4 -1.2 -2.3
-7.4 -2.5 -2.2
-8.0 -4.2
-88.00 -2.8 -3.4
3.4
-9.0
90 -3.2
32
-10.0 -10.0-9.7
-10.0
-12.0
-12.0
-14.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Foodd
F Non-food
N f d consumer goods
d C it l goods
Capital d
Trade Services Income Transfers Current account balance
Non-energy intermediate goods Energy products
Source: ICO, European Commission and ACF Research Source: Ministry of Economy, INE, Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 9

 June, 2010

External sector ((II):

) Net external financing
g needs

` Net external financing needs may amount to some €45bn in 2010e (vs. €99bn in 2008).
` A more vulnerable financing profile: 65% of these needs covered through short-term investments (basically ECB).
` Spanish
S i h net externall debt
d b already
l d represents 94%
9 % off GDP
G (from
(f 32% in
i 2000).
2000)
` Increased negative impact due to the current account deficit.
` Key challenge: increase long term international direct investments.

Spain: Financing needs Spain: Net international investment position

20 350 0 0
6 -99 -113 -130
3 4 -171 -186 -202
0 -243 -10
0 300 -303 -354
-200 -436
-505 -20
-9 -648
-20 250 -22 -24 -30
-20 -19 -400 -26
-24 -23 -817
32 -32
-32 32 -32
32 881
-881
-983 -40

(as % of GDP)
-40 200 -36
-41 -39 -42
(€bn)

(€bn)

(€bn)
-45 -600 -45 -50
-49
-60 150 -52
-59 -56 -60
-800
-80 100 -66 -70
-83
83
-80
-100 50 -1,000 -78
-101 -99 -81
-90
-120 0 -1,200 -94 -100
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010e
2011e

1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Financing capacity (+)/ need (-) (LHS) Gross national savings (RHS) GFKF (RHS) Net international investment position (LHS) GDP (RHS)

Source: INE and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 10

 June, 2010

Employment
p y ((I):
) 2Mn jjobs destroyed
y

` Spain may destroy some 2.0Mn jobs in 2008, 2009 and 2010e (c. 10.0% of total employment).
` We expect a decline of further –0.3Mn jobs in 2010e and an increase of 0.3Mn in 2011e.
` Number
b off employed
l d may decline
d li to 18.1Mn/18.4Mn
8 / 8 in
i 2011e
20 from
f the
h 20.5Mn
20 peakk in
i 3Q07.
3Q0
` The construction sector has already destroyed 1.1Mn (–40.0%) while the industrial sector has reduced its workforce by
0.7Mn (–21.5%).
` The service sector is holding
g up
p well and alreadyy represents
p 72.3% of total workforce.
` Unemployment rate should reach 20.4% and 20.8% in 2010e and 2011e implying 4.8Mn-5.2Mn unemployed.

Spain: Employment trend by sectors Spain: Employment vs. GDP

25 8 8

6 6
20 5.7 5.9 5.6
5.5
4 4
4.3 4.44.1
3 83.6
3.8 3.6 3.6
2 2 2.7 3.03.3 2.9
15 2.5 2.4
2.0
(Mn)

(%)
0
(%)
0 0.6 0.8
0.1 -0.2
-0.4-0.6
10
-2 -2
-2.3
23 -2.6
-4 -4 -3.3 -3.1 -3.3 -3.0
5
-6 -6
-6.1
0 -8 -8
19881

19883

19885

19887

19889

19991

19993

19995

19997

19999

20001

20003

20005

20007

20009

2011
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Agriculture (LHS) Industry (LHS) Construction (LHS) Services (LHS) % inc. (RHS) GDP Employment

Source: INE and ACF Research Source: INE and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 11

 June, 2010

Employment
p y ((II):
) Two g
groups
p of citizens

` A tale of two groups of citizens: fixed-contract workers vs. temporary workers.

` Temporary workers have already declined by –31.0% up to 1Q2010, while the number of fixed contract workers has
basically remained stable.
` The difference: severance pay: 10 days vs. 45 days.
` Civil servants increased by 1.9% in 1Q10, totalling 3.1Mn or 20% of employees in Spain.

Spain: Employment trend by type of contract Spain: Civil servants

25,000 40 3,500 30
32
3,000 25
30
20,000
19 20
2,500
17 20
15,000 15
9 8 (% inc.) 2,000
(000)

6 7 6 7 10

(000)
4 5

(%)
3 2 4 4 4 10
2
10,000 0 1,500
-5 -4 0 5
-6 -88
1,000
5,000 -13 0
-15 -10
500 -5
0 -20
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1Q10

0 19887 -10
19888
19889
19990
19991
19992
19993
19994
19995
19996
19997
19998
19999
20000
20001
20002
20003
20004
20005
20006
20007
20008
20009
1Q110
Fixed- contract workers (LHS) Temporary workers (LHS)
Self-employed (LHS) Temporary workers (% inc.) (RHS) Civil servants (LHS) % total employed (RHS) % inc. (RHS)

Source: INE and ACF Research Source: INE and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 12

 June, 2010

Employment
p y ((III):
) The long
g awaited labour market reform

` Trade unions and national business association(CEOE) to reach an agreement before the deadline date: June, 11th
(deadline pushed back twice).
` Should agreement not be reached, the Government will approve its own reform.
` Consensus is highly unlikely mainly because of differences on severance payment
` Government draft to be approved by Royal-Decree next June, 16th (according to the press):
` Severance p
payment
y to be reduced from 45 to 20 days
y if companies
p have economic problems
p (currently,
( y, onlyy applied
pp to
companies in the red).
` The contract to promote employment , with just 33 days of severance payment, to be applied to all new contracts.
` Penalize overuse of temporary contracts (limit short contracts to maximum 2 years).
` Increase severance payment for subcontracts.
` Promote part-time contracts (German model).
` Set up a severance payment fund (Austrian model) which would pay 8 of the 33 days of severance pay for long-term
contracts.
` If the Government approves this draft without consensus, trade unions will go on strike next June, 28th.
` In our view, there are important elements that are not in this “ informal” proposal:
` Collective agreements.
g
` Social security costs: amongst the highest in Europe.
` Linkage of salary increases to productivity instead of CPI.

Ahorro Corporación Financiera, S.V., S.A. 13

 June, 2010

Public sector ((I):

) From a 2% surplus
p to a 11% deficit in jjust two y
years

` Budget deficit may decline to –9.8% and –6.7% of GDP in 2010e and 2011e vs. –11.2% in 2009, according to our forecasts.
` Government's forecasts have been revised downwards: –9.3% and –6.0% in 2010e and 2011e (–9.8% and –7.5%
previously).
` How to achieve –3.0% deficit (c. €80bn reduction) medium term
` Further cost-cutting measures to be implemented in the future.
` Are tax increases avoidable?
` Challenges ahead: looking for ways to rein in costs of all administrations.

Spain: Budget deficit trend Spain: Expenditure breakdown by authorities (2008)

4.0
2.0 1.9
2.0
1.0
0.0 -0.3 0.0 -0.2 Central government
-0.5 22%
0.5 -0.6 -0.5 -0
-00.22 -0.5 0.1
-0.1 Social securityy
0 5 -0.22 -0.3
-0.5 03
-2.0 -1.0 -0.6 -1.1
29%
-0.3 -0.4 -1.4
(as % of GDP)

-1.6 -3.3 -1.3

-4.0 -0.6
-3.0
-3.4 -3.2
-6.0 -0.6 -4.1 -4.4
-4.8
-3.1
-8.0
8.0 -6.0
-6.5
65
-10.0
-2.0 Local governments
-9.3 13%
-12.0 Regional
governments
-14.0 -11.2 36%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

Central gov. Regional gov. Loval gov. Social security

Source: Ministry of Economy, Bank of Spain and ACF Research Source: Ministry of Economy, Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 14

 June, 2010

Public sector ((II):

) Regional
g g
governments’ 2010e deficit

Spain: Regional governments’ 2010e deficit

35.0
31.5

30.0
27.0

25.0 24.0
22 3
22.3
20.1
20.0 18.6 18.3
18.0 17.6
16.5 17.0 17.0
15.0 15.0
15.0 14.1
(as % off GDP)

13.1

9.7
10.0

5.0

0.0
-0.7
-2.1 -2.4 -2.3 -2.2 -1.8
-2.8 -2.9 -2.7 -2.6 -2.5 -2.6 -2.7 -2.7
-3.2 -3.1
-5.0 -3.8

-10.0
Caastilla- La Mancha

Extremadura

Madrid

Murcia
Andalucía

Aragón

Cantabria

Castilla León

Cataluña

Galicia

Rioja

Navarra

País Vasco

Valencia
Asturias

Baleares

Canarias

Deficit (%) Expenses (%)

Source: Ministry of Economy, Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 15

 June, 2010

Public sector ((III):

) Government stimulus p
packages
g

` Total stimulus packages implemented since 2008 amount to some €47.5bn (4.3% of GDP).
` Revenues measures:€28.5bn, including personal income tax reduction and wealth tax elimination.
` Expenses measures: €19.0Mn,
€ 90 including
i l di local
l l governments’’ civil
i il works,
k strategic
i sectors and
d the
h car industry.
i d
` The Sustainable Economy Law (to be approved):
` Aim: to improve the economy, competitiveness and environment.
` Reforms of supervisory & control organisms (CNE
(CNE, CMT),
CMT) improvement of financial regulation
regulation, reduce bureaucracy
bureaucracy,
reduction of the payment periods of the public administrations.
` Specific measures:
` Tax measures related to real-estate market: elimination of the deduction on acquisition of first home in 2011.
` Financial instruments: €20.0bn co-financed (ICO and financial institutions).
` The March 2010 government proposal (March, 2010):
` VAT reduction and tax deductions for home remodelling.
` Loans and credit: promoting direct financing to SMEs (ICO) and speeding up the payment deadline for Public
Administration’s to 30d and to 60d for large companies.
` Increasing competitiveness: simplify administrative processes, international expansion of SMEs, R&D, define energy
policyy for 2020,, promote
p p off-season tourism.
` Giving a boost to industrial policy: increasing the industrial sector’s weight from 15.5% to 18% of GDP, defining
the new strategic sectors (automotive, aerospace, IT and Agri-food).
` Reigning in budget deficit: cut personnel expenditure (-4%) and a plan to “streamline” government (cut pay for top-
tier government jobs)
` Easy financing for SMEs and families: speeding up consolidation of the financial system and use of FROB
programme.

Ahorro Corporación Financiera, S.V., S.A. 16

 June, 2010

Public sector ((IV):

) The “PLAN” ((May,
y 2010))

` Goal: reduction of the budget deficit by additional €16bn in 2010 and 2011 on top the €15bn already announced in January.

` Measures and
d estimated
i d savings:
i
` Average reduction in civil servants’ pay of 5% in 2010 and freezing in 2011: €3,169Mn and €2,472Mn, respectively.
` Reduction in infrastructure investments: €2,125Mn in 2010 and €2,125Mn in 2011.
` Pension payments freezing in 2011: €1,530Mn.
€1 530Mn
` Elimination of transitory early retirement system: €250Mn in 2010 and €150Mn in 2011.
` Elimination of the childbirth allowance of €2,500: €1,250Mn in 2011.
` Pharmaceutical costs cuts: €275Mn in 2010 and €1,025Mn
€1 025Mn in 2011.
2011
` Foreign aid cuts: €300Mn in 2010 and €500Mn in 2011.
` End to retroactive payments for new applicants for dependency allowances: €300Mn in 2011.
` Regional and local governments will make an additional saving of €1,200Mn (2010
(2010-11).
11).
` Breakdown of total savings: €6.7bn in 2010e and €10.0bn in 2011e (or 0.6% of GDP and 1.0% of GDP).
` Impact on Spanish GDP: –0.5% in 2011e:
` Private consumption
p to be eroded byy –0.2%.
` Non-residential construction investment reduced by –0.2%
` Public expenditure to be reduced by an additional –0.1%.

Ahorro Corporación Financiera, S.V., S.A. 17

 June, 2010

Public debt ((I):

) Issuance needs in 2010

` Public debt to GDP will jump to c. 66.0% in 2010e from 36.0% in 2007.
` Spain’s new issuing needs would rise to c. €100bn in 2010e (excluding FROB, tariff deficit, etc.).
` Gross
G iissues (including
(i l di outstanding
di short-term
h d b ) would
debt) ld amount to c. €235bn.
€23 b
` Regional governments’ new issuance needs may amount to c. €100bn in the 2010-2013 period.

Eurozone: Issuance activity (2010e) Spain: New issuance needs

600 50 1 000
1,000 140

45 900 120
500 45 449 40 800 118
100
400 35
400 700 99
344 30 80
600
(€bn)

(%)
300 28 25 60
26 233 27 26 65

(€bn)

(€bn)
24 23 20 500
22 50 40
200 19 44
15 400
116 17 17 35
90 10 29 20
100 65 300 23
38 36 29 39 5 17 17
8 6 4 0
200 3 2 3
0 0
-9 -20
Ireland

France
Austria

Greece
Portugal

Netherlands

Germany
Finland

Spain

Belgium

Italy

100
-20-20
0 -40
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total gross issuance (2010e) Gross issuance (1Q10) % of total issuing needs
Outstanding debt (LHS) Net issuance needs (RHS)

Source: ECB, European Commission and ACF Research Source: Ministry of Economy, INE, Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 18

 June, 2010

Public debt ((II):

) Regional
g g
governments’ debt

Spain: Regional governments’ debt

9,000 16

8,000 14
14.2

7,000
12
12 3
12.3 12.2
6,000
10

5,000
8.9
(€bbn)

%)
(%
4,000 8

6.6 6.6 6
3,000 5.9 5.9
5.5 5.7
5 49
4.9 49
4.9
4
2,000 4.2
3.9

1,000 2.5 2

0 0
Andalucía

Aragón

Cantabria

Caastilla- La Mancha

Castilla León

Cataluña

Extremadura

Galicia

Rioja

Madrid

Navarra

País Vasco
Asturias

Valencia
Murcia
Baleares

Canarias

Net issuance needs (LHS) Debt/GDP (RHS)

Source: Ministry of Economy, Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 19

 June, 2010

Public debt ((III):

) Sovereign
g risk

` Spain has already suffered from a ratings downgrade

` Fitch to AA+ from AAA, stable outlook (May 28th, 2010).
` S&P to AA from
f AAA negative
AAA, i outlook
l k (January,
(J 19 h and
19th d April
A il 28th,
28 h 2010)
2010).
` Moody’s rating still at Aaa.
` France and Germany: the largest holders of Spain’s debt.
` Is Spain’s weakened position already priced in the country risk?
` Regional governments’ debt: a new investment opportunity.
10 yr. Bond IRR spread vs. Germany Eurozone: 5 yr. CDS

700 1 200
1,200

600
1,000

500
800
400
(p.b.)

(p.b.)
600
300

200 400

100 200

0
0
30-abr-92
30-abr-93
29-abr-94
28-abr-95
30-abr-96
30-abr-97
30-abr-98
30-abr-99
28-abr-00
30-abr-01
30-abr-02
30-abr-03
30-abr-04
29-abr-05
28-abr-06
30-abr-07
30-abr-08
30-abr-09
30-abr-10

Oct-08

Oct-09
Feb-08
Dec-07

Apr-08

Jun-08

Aug-08

Feb-09
Dec-08

Apr-09

Jun-09

Aug-09

Feb-10
Dec-09

Apr-10
Ireland Greece Italy Spain France Portugal Germany Spain Greece Ireland Italy Portugal US

Source: Bloomberg and ACF Research Source: Bloomberg, Reuters and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 20

 June, 2010

Public debt ((IV):

) Regional
g g
governments’ debt - ASW

Regional governments’ debt: average ASW (March 4th, 2010)

160
150 151

140 137 136

131 131

122
120
112 112
110
108 107
105 105
101 101
100 95 97
92 93
89 90 89
86 86
84
81 82
(b.p.)

80

66

60 56

40

20

0
Andalucia Aragon Baleares Canary Castilla-Leon Catalonia Galicia Madrid Castilla-La Murcia Navarra Valencia
Mancha

2-4 yrs. 4-6 yrs. 9-11 yrs.

Source: Bloomberg and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 21

 June, 2010

Real estate sector ((I):

) Has it touched bottom?

` We estimate a –17.6% drop in investment in residential construction in 2010e and –7.3% in 2011e (–24.5% in 2009).
` Housing starts: c. 150,000 in 2009e and 2010e. (–57% vs. 2008 and –80% vs. peak housing starts)
` Finished
i i h d houses
h may reach
h low
l in
i 2011e
20 or 2012e.
20 2
` Investment in residential construction may represent c. 6.0% of GDP in 2011e from maximum of 9.0% in 2006.
` Still above lows of the early nineties.
` Key challenge: reduce dependence on the residential construction sector
sector.

Spanish GDP: Investment in construction Spain: Housing starts

20 900 000
900,000 120
18 18 18
18 17 800,000 100
16 16
16 16 16 15 15
16 15 80
15 14 700,000
14 14 14
13 13 14 14 13
14 13 13 60
12 13 600,000
12 12 12 12 12 12
12 40
(as % of GDP)

500,000

(units)

(%)
10 20
400,000
8 0
300,000
6 -20
9 9 9
4 8 9 200 000
200,000 -40
7 8 7 7
6 6 6 6 7 6
5 5 4 4 5 5 5 5 5 4 5
2 4 4 4 5 5 5 100,000 -60

0 0 -80
1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010
1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010e

Investment in construction of which housing Housing starts (LHS) % inc. (LHS)

Source: INE and ACF Research Source: INE and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 22

 June, 2010

Real estate sector ((II):

) Cruising
g speed
p

` Population and household growth explains the high demand from 2000 to 2008.
` Number of households increased by c. 3.5Mn.
` Structural
S l annuall demand
d d reduced
d d to 250,000-300,000
2 0 000 300 000 dwellings
d lli (f
(from 400,000-450,000
00 000 0 000 ini 2000-2007).
2000 200 )
` Existing stock: c. 1Mn.
` “Cruising speed” not to be reached until at least 2015. Peak figures not foreseeable in the medium term.

Spain: Housing starts Housing starts: comparison with prior crisis

800 40 120
29 Feb-1974 Mar-1981 Oct-1989 Jan-2007 ACF estimates
26 25 25 30
700
17 19
17 20 100
15 14
11 13 11
600 10 9

(Base 100: moonth of peak housing starrts)

8 6
5 4 4 4 10
2 3
0 -2
500 -3 80
-6 -5 -6 0
(thousands)

-10
-13
400 -16-15 -10
(%)

-19
60
-20
300
-30
200 40
-44 -40
100 -54 -50
20
0 -60
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010e
2012e
2014e

0
1
6
11
16
21
26
31
36
41
46
51
56
61
66
71
76
81
86
91
Housing starts (LHS) Housing starts (% inc.) (RHS)

Source: Ministry of Housing, Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 23

 June, 2010

Real estate sector ((III):

) Prices

` Prices may fall by –1.0%/ –5.0% in nominal terms in 2010e (– 6.3% in 2009), totalling a – 11.0%/ –15.0% drop from peak
levels (–19.0%/ – 24.0% in real terms).
` Interest rate decline imply c. –27%
27% drop in mortgage payments.
` We expect 0% price increases in the medium term, implying c. –35% in real prices in eight years.

Price per square metre (% inc.) Price per square metre trend

3 500
3,500

35
3,000
30 Less than 2 years old More than 2 yrs.

25 Real price (Sociedad de Tasación) Average (Sociedad de Tasación)

2,500
Average
20

(€ per square meter))

2,000
15
(% inc.)

10
1,500
5

0 1,000
,

-5
500
-10

-15 0
1995

1996

1997

1998

1999

22000

22001

22002

22003

22004

22005

22006

22007

22008

22009

22010
1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Average Less than 2 years old More than 2 yrs. Madrid País Vasco Extremadura

Source: Ministry of Housing, Sociedad de Tasación and ACF Research Source: Ministry of Housing, Sociedad de Tasación and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 24

 June, 2010

Real estate sector ((IV):

) Why
y prices
p have not fallen much

` Average payment declined by –27.3% in 2009.

` We expected payments to be stable in 2010e but they may increase by c. 17.0% in 2011e due to higher interest rates.
` Affordability
ff d bili ratio
i dropped
d d to 27.9%
2 9% in
i 1Q10
Q 0 from
f 34.1%
3 % in
i 1Q09
Q09 and
d a maximum
i off 42.5%
2 % in
i 3Q08.
3Q08
` We expect this level to hold steady in the coming years.
` Higher interest rates impact to be offset by increasing family income and flat property prices.
` Tax savings to be eliminated as of 2011 (for rentals higher than €24,000):
€24 000): c.
c 6.0
6 0 p.p.
p p impact

Annual mortgage payments Affordablity ratio

60.0
12,000 0
-5 -5
-9 50.0
10,000 -14 -10
-17
-19
40.0
8,000 -23 -24 -20
-25 -26
-27.3
-29

(%)
30.0
(%)

6,000 -30
(€)

-40 -39
4,000 -44 -40 20 0
20.0

-50 -50 -50 -49

2,000 -50 10.0

0 -60 0.0
19900
1991
19922
19933
19944
19955
19966
19977
19988
19999
20000
2001
20022
20033
20044
20055
20066
20077
20088
2009ee
2010ee
2011ee
2012ee

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010
Initial payment 2009e payment 2011e payment Payment reduction (%) (RHS) Affordabilty ratio Affordabilty ratio (inc. tax savings)

Source: AHE, Bank of Spain ACF Research Source: AHE, Bank of Spain ACF Research

Ahorro Corporación Financiera, S.V., S.A. 25

 June, 2010

Financial sector ((I):

) Earnings
g outlook

` 2010e financial sector’ domestic earnings under real pressure: The year earnings touch bottom
` Lack of volume growth
` Margin
i erosion
i
` High NPLs provisioning needs
` Reducing installed capacity should be a must:
` A consolidation process under way
` Large Spanish banking groups to benefit from international diversification

Financial sector: net profit trend Spanish quoted banks: net profit trend (Base 100: 2007)

30,000 500 160

400 140
25,000
120
300
20,000
100

(Base 100: 2007)

200
(€Mn)

15,000 (%) 80
100
60
10 000
10,000
0
40
5,000
-100
20

0 -200 0
1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2008 2009e 2010e 2011e

Net profit (LHS) % inc. (RHS) SAN BKT BBVA BTO SAB POP

Source: Bank of Spain and ACF Research Source: Companies and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 26

 June, 2010

Financial sector ((II):

) Volume g
growth

` Loan book may decline by c. –2%/–5% in 2010e (–1.8% in 2009).

` Difficult financing environment for SMEs: commercial lending has dropped by – 25.5%.
` Weakk residents
id deposit
d i trend.
d
` Mutual funds.
` Other riskier alternatives.

Spanish loan book vs. Retail deposits Spanish loan book growth

2,000 200 30

1,800 148 153

25
150
1,600 126

1,400
, 20
100
1,200 67
50 15
40 36 38 (€bn)
(€bn)

1,000 36 50

(%)
15 21
9 11 10
800 -2 4 -8 -2
-18 0
600 -33
33 5
400
-70 -50 0
200

0 -100 -5
19990
19991
19992
19993
19994
19995
19996
19997
19998
19999
20000
20001
20002
20003
20004
20005
20006
20007
20008
20009

19989
19990
19991
19992
19993
19994
19995
19996
19997
19998
19999
20000
20001
20002
20003
20004
20005
20006
20007
20008
20009
Loans (LHS) Deposits (LHS) Annual wholesale financing needs (RHS) System Banks Savings banks

Source: Bank of Spain and ACF Research Source: Companies and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 27

 June, 2010

Financial sector ((III):

) Asset q
quality
y

` Asset quality may deteriorate further:

` We expect NPLs ratio to rise to 6.0% by Dec., 2010e (vs. 3.4% Dec. 2008 and 5.1% Dec., 2009).
` Coverage
C may ffallll to 53% b
by D
Dec. 2010
2010e ((vs. 70
70.8%
8% D
Dec. 2008 and
d 58
58.6%
6% D
Dec., 2009)
2009).
` However:
` Declining rate of growth of NPLs: +48% by Dec., 2009 (vs. c. +300% in 2008).
` Net entries to NPLs expected to decline in 2010e to cc. 1
1.5%
5% from cc. 3
3.0%
0% in 2009e
2009e.

Non performing loans vs. coverage NPL ratio vs. GDP

10 0
10.0
120,000 350

8.0
300
100,000
6.0
250
80 000
80,000 4.0

200 2.0

(%)
(Mn€)

60,000
(%) 0.0
150

40,000 -2.0
100
-4.0
20,000
50 -6.0

0 0 -8.0
1985
11986
11987
11988
11989
11990
11991
11992
11993
11994
11995
11996
11997
11998
11999
22000
22001
22002
22003
22004
22005
22006
22007
22008
22009
22010
1982
11983
11984
11985
11986
11987
11988
11989
11990
11991
11992
11993
11994
11995
11996
11997
11998
11999
22000
22001
22002
22003
22004
22005
22006
22007
22008
22009
Maar-09
Maar-10

1
1

NPLs (LHS) Loan loss provisions (LHS) Coverage ratio (%) (RHS) GDP (% inc.) NPL ratio (%) Employment (% inc.)

Source: Bank of Spain and ACF Research Source: Companies and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 28

 June, 2010

Financial sector ((IV):

) The solvency
y issue

` Spanish financial system has not suffered from a solvency crisis.

` 2010e: the crucial year.
` Based
d on our figures,
fi the
h core capital
i l ratio
i off the
h system may stabilize
bili at 7.1%-7.4%
% % in
i the
h forthcoming
f h i years.
` We estimate the system may tolerate a 11.5%-12.0% NPL ratio prior to needing massive capital injections, although there
could be outliers.
` Excess capital
p amounts to c. €50bn,, implying
p y g abilityy to absorb c. 5.0% of loan losses (assuming
( g a 50% recoveryy rate).
)
` The Spanish government has already implemented the mechanism for supporting the system: FROB.

Spanish
p financial sector: base case scenario Spanish
p financial sector: core capital
p ratio

35,000 7.4 8.0 10 9.3

7.1 9.1
6.8 9 8.8 8.8 8.6
7.0 8.4
30,000 8.0 7.9 7.8 7.7
8 7.5 7.6 7.4
5.8 7.2 7.3 7.1
7 1 7.3
60
6.0
25,000 7
5.0
5.0 6
20,000

(%)
5
(€Mn)

(%)
4.0
3.4
15,000 4
30
3.0
3
10,000
2.0 2
0.9 1.4 1.5 1.4
5,000 0.7 1.1 1
0.9 1.0
0.4 0.5 0.5 0
0 0.0
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014
2006 2007 2008 2009 2010 2011 2012 2013
PBT (LHS) NPL ratio (%) (RHS) Provisioning effort (%) (RHS) Base case scenario (%) 2010e NPL ratio: 8% 2010e NPL ratio: 12%

Source: Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 29

 June, 2010

Financial sector ((V):

) FROB

` The Spanish government approved a recapitalisation program in June 26, 2009.

` Initial funds’ availability: €9bn (€6.2bn from government and €2.8bn from DGFs).
` Leverage permitted: 3x in 2009 and 10x from 2010e onwards.
onwards
` Total funds’ availability: €36bn in 2009e and €99bn in 2010e onwards.
` €3.0bn already issued (Nov., 2009)
` The Government has guaranteed the issuance of €27.0bn in 2010
` FROB has two main functions:
` Manage those institutions previously intervened by the BoS.
` Provide funds for integration processes.
FROB capacity

Sav ings banks undergoing restructuring

FROB Rest of Sav ings Banks + Banks

Equity

Domestic lending

0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000

Source: ACF research

Ahorro Corporación Financiera, S.V., S.A. 30

 June, 2010

Financial sector ((VI):

) Consolidation p
process

` Excess capacity in the sector should lead to a restructuring process

` Branch closure programs.
` On
O our figures,
fi to restore profitability
fi bili in i the
h medium
di term, generall expenses should
h ld be
b reduced
d d by
b c. -25%.
2 %
` FROB is expected to provide support.

Spanish financial sector: margin erosion Spanish financial sector: volume productivity
(%) (%) 10 90
90.0 4.5
9 80
80.0 4.0
8
70.0 3.5 70
6.9 7.0
7 66
6.6
60.0 3.0 60
6 52.0
50.0 2.5 50
4.8

(€Mn)

(€Mn)
40.0 2.0 5 40.9
4.3
35.5 40
4 3.7
30.0 1.5
27.2 25 9
25.9 30
3 25 2
25.2
20.0 1.0
20
10.0 0.5 2

0.0 0.0 1 10
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

0 0
System Banks Savings banks
Impairment losses/NOP (LHS) NOP/Loans (RHS) Deposits per branch Loans per branch Deposits per employee Loans per employee

Source: Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 31

 June, 2010

Financial sector ((VII):

) Savings
g banks

` Non-profit commercial organisations: no shareholders.

` Regulatory bodies: Central government, Bank of Spain and Regions (CC.AA.).
` General
G l Meeting:
i representatives
i from
f unions,
i depositors
d i and
d regions.
i
` Core capital: only increased by retained earnings
` “Cuotas participativas”: no success (only CAM).

Spain: Lending market shares trend Spain: Market shares by type of loan (December, 2009)

70.0 70
64
61 60
60.0 58 60 58
54 54 54 53 53 55 54 55
52 51 50 52 51 52 51 52
50 49
50.0 47 46 50
45 44 44 45
44 44 43 433 44
40 41
39
40.0 40 37 37

(% of total)
(% of toal)

32
30.0 30

46 46 47 47 47 48 48
20 0
20.0 39 40 41 42 43 44 20
35 35 36 38
27 28 28 30 32
27
10.0 22 23 23 24 25 10

0.0 0
House Individuals- Industry Construction Real estate Other services
19983
19984
19985
19986
19987
19988
19989
19990
19991
19992
19993
19994
19995
19996
19997
19998
19999
20000
20001
20002
20003
20004
20005
20006
20007
20008
20009
20010

acquisition other
Banks Savings banks Banks Savings banks

Source: Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 32

 June, 2010

Financial sector ((VIII):

) Savings
g banks’ consolidation

` Savings banks representing c. 80% of assets are involved in some consolidation process, either a common merger or a SIP.
` Financial aid from the FROB:
` Manlleu, Sabadell & Terrassa: €380Mn
` Catalunya, Tarragona & Manresa: €1.250Mn
` Caja Duero & Caja España: €525Mn

Savings banks: announced consolidation processes

% Loans % Assets % Deposits % Equity % Earnings % Loans % Assets % Deposits % Equity % Earnings
Mergers SIP
Caixanova 2.0 2.1 2.2 2.0 3.5 La Caixa 20.7 19.7 18.5 18.1 31.2
Galicia 4.0 3.6 3.6 2.6 2.8 Girona 0.7 0.6 0.7 0.7 0.7
6.0 5.7 5.9 4.6 6.3 21.3 20.3 19.3 18.8 32.0
Manlleu 0.3 0.2 0.3 0.2 0.2 Mediterráneo 5.8 5.6 5.7 4.3 8.9
Sabadell 1.1 1.0 1.3 0.9 1.4 Asturias 1.2 1.2 1.4 2.3 4.6
Terrassa 0.9 1.0 1.2 0.9 1.7 Santander-Cantabria 0.9 0.8 1.0 0.8 1.4
Unnim 2.3 2.2 2.7 2.0 3.3 Extremadura 0.6 0.6 0.8 0.8 1.3
Catalunya 5.4 4.8 4.0 4.4 2.3 Castilla-Mancha 2.0 2.0 2.2 -0.3 -13.1
Tarragona 0.8 0.9 0.8 0.8 0.6 10.5 10.2 11.0 7.9 3.1
Manresa 0.5 0.5 0.6 0.5 0.5 Murcia 1.7 1.7 2.0 2.1 4.5
6.7 6.2 5.4 5.7 3.4 Baleares 1.1 1.1 1.3 0.8 0.6
Caja Duero 1.5 1.7 1.8 1.8 1.6 Granada 1.2 1.1 1.3 1.1 1.0
Caja España 1.7 2.0 2.2 1.5 1.2 Penedés 1.9 1.8 2.0 1.5 1.3
3.2 3.6 4.1 3.3 2.8 5.9 5.6 6.7 5.5 7.5
Cajasol 2.4 2.3 2.8 2.5 3.3 Madrid 13.2 14.8 11.2 14.9 11.5
Guadalajara
j 0.1 0.1 0.2 0.1 0.1 Laietana 0.8 0.7 0.9 0.7 0.9
2.5 2.5 3.0 2.6 3.3 Ávila 0.5 0.6 0.6 0.6 0.5
Unicaja 2.7 2.7 3.0 4.2 8.5 Insular Canarias 0.7 0.7 0.9 0.6 0.8
Jaén 0.1 0.1 0.1 0.1 0.1 Segovia 0.5 0.5 0.6 0.5 1.1
2.8 2.7 3.1 4.3 8.6 Rioja 0.3 0.3 0.3 0.3 0.4
16.0 17.6 14.6 17.7 15.2
Source: CECA, CNMV and ACF Research
Navarra 1.5 1.5 1.7 1.8 3.9
General Canarias 1.1 1.1 1.3 1.3 1.7
Burgos Mpal. 0.9 1.0 1.0 1.4 1.0
Banca Cívica 3.5 3.6 4.0 4.6 6.6

Ahorro Corporación Financiera, S.V., S.A. 33

 June, 2010

Financial sector ((VIII):

) QQuoted banks

` Santander (Buy): benefits from growth an restructuring in Brazil, decent domestic trend+ attractive valuation.
` Domestic banks: looking for good time to buy.
` Earnings
i recovery expected
d 2011e
20 onwards
d
` Consolidation:
` Acquisition of savings banks networks.
` Among the banks?

Banking sector: Selected data

Price TP Mkt.cap Net profit (€Mn) P/E Div. Yield EPS growth (%) Adj ROE (%)
Bank Rec. (€) 2010e (€Mn) 10e 11e 12e 10e 11e 12e 10e 11e 12e 09 10e 11e 10e 11e 12e
Grupo Santander Buy 8.2 11.9 67,493 9,032 11,303 15,206 7.5 6.0 4.3 7.4 8.4 11.5 -22.9 0.3 25.2 18.1 21.1 24.4
BBVA B
Buy 84
8.4 11 6
11.6 31 475
31,475 4 733
4,733 5 422
5,422 7 039
7,039 67
6.7 58
5.8 44
4.4 68
6.8 8 6 11.4
8.6 11 4 -16.1
16 1 12 4
12.4 14 6
14.6 19 8
19.8 20 2
20.2 22 8
22.8
Banco Popular Hold 4.1 6.3 5,520 748 685 1,142 7.4 8.1 4.8 6.5 6.0 10.1 -29.3 -8.3 -8.4 10.3 8.5 12.1
Banesto Hold 6.5 10.0 4,502 487 567 696 9.2 7.9 6.3 5.4 6.3 8.1 -28.2 -13.0 16.3 12.0 11.4 12.3
Banco Sabadell Hold 3.5 5.0 4,142 391 425 683 10.6 9.7 5.9 4.7 5.1 8.4 -21.0 -25.3 8.9 12.1 11.2 12.5
Bankinter Sell 4.6 5.9 2,195 235 274 316 9.3 8.0 6.8 4.8 5.6 6.6 -6.0 -9.6 16.4 11.7 12.1 12.9
B
Banco Pastor
P t UR 38
3.8 UR 990 76 121 166 13 0
13.0 82
8.2 62
6.2 23
2.3 37
3.7 49
4.9 -38.4
38 4 -24.5
24 5 58 0
58.0 87
8.7 89
8.9 11 5
11.5

Source: Companies and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 34

 June, 2010

Financial sector ((IX):

) Health of the q
quoted banks

Quoted banks: selected figures

(% inc.) NII (% inc.) Fees (% inc.) Total revenues (% inc.) Total costs (% inc.) NOP (b.p.) Risk premium
Santander 25.6 Santander 0.7 Bankinter 18.2 Popular -2.2 Santander 23.9 BBVA 164.8
BBVA 18.8 Banesto -1.9 Santander 17.6 BBVA -1.2 Sabadell 18.9 Popular 160.1
Bankinter 17.7 BBVA -2.1 Sabadell 12.5 Banesto 0.6 Popular 18.0 Santander 138.9
Popular 11.3 Sabadell -8.4 Popular 10.9 Sabadell 5.9 Bankinter 17.2 Banesto 64.2
Sabadell 10.2 Bankinter -10.5 BBVA 8.9 Santander 9.2 BBVA 17.0 Bankinter 57.7
Banesto 9.6 Popular -11.7 Banesto 4.8 Bankinter 19.1 Banesto 7.4 Sabadell 30.4
(% inc.) DPS (% inc.) Loans (% inc.) Deposits (%) NPLs ratio (%) Coverage ratio (%) Core capital
Santander -7.8 Santander 9.6 Santander 20.6 Bankinter 2.5 Santander 75.3 Popular 8.6
Bankinter -14.3 Popular 4.2 Popular 15.8 Banesto 2.9 Bankinter 74.4 Santander 8.6
B
Banesto
t -18.2
18 2 S b d ll
Sabadell 05
0.5 S b d ll
Sabadell -0.2
02 S t d
Santander 32
3.2 S b d ll
Sabadell 69 0
69.0 BBVA 80
8.0
Sabadell -22.2 Bankinter -1.4 BBVA -0.4 Sabadell 3.7 Banesto 63.4 Banesto 7.7
BBVA -31.6 Banesto -2.9 Banesto -1.9 BBVA 4.3 BBVA 57.0 Sabadell 7.7
Popular -37.6 BBVA -3.1 Bankinter -4.9 Popular 4.8 Popular 50.3 Bankinter 6.5

Source: ACF Research

Business in Spain: asset quality trend

SAN BBVA POP BTO SAB BKT PAS
2007 NPL ratio (%) 0.6 0.9 0.8 0.5 0.4 0.4 0.8
Coverage (%) 264.5 229.0 218.4 329.5 417.1 370.3 251.3
Total loans (gross), Spain (€bn) 235 204 87 74 62 38 20
2008 NPL ratio (%) 20
2.0 21
2.1 28
2.8 16
1.6 24
2.4 13
1.3 36
3.6
Coverage (%) 98.5 66.5 73.0 105.4 106.9 120.2 64.0
Total loans (gross), Spain (€bn) 247 208 92 77 63 40 21
2009 NPL ratio (%) 3.4 5.1 4.8 2.9 3.7 2.5 4.9
Coverage (%) 73.4 47.7 50.3 63.4 69.0 74.4 53.3
Total loans (gross), Spain (€bn) 238 199 97.4 74.7 61.3 39.9 21.2
Source: Companies and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 35

 June, 2010

Ahorro Corporación Financiera, S.V., S.A. 36

 June, 2010

Annex

` Annex 1. Population and employment

` Annex 2.
2 Housing
i market
k ini Spain
S i

` Annex 3. Spanish financial system

` Annex 4. Spanish Government and external debt

Ahorro Corporación Financiera, S.V., S.A. 37

 June, 2010

Population
p and employment
p y ((I):
) Population
p

` The population in Spain increased at a 1.6% CAGR in 2000-2009, to 46.7Mn in 2009, up from 40.5Mn in 2000.
` The immigrant population rose at a CAGR of 21.5%, reaching 5.3Mn in 2009, up from 0.9Mn in 2000, and already
represents 11.4% of total population.
` Highest growing population among large European countries.

Spain: Population trend Europe: Population trend comparison

48.0 125
46.7
46.2 2000
Immigrants
46 0
46.0 S i d
Spaniards 2009
45.2 120
44.7 2011e 118
44.1
44.0
43.2
42.7

(Base 100: 1991)

115
41.8
42.0
41.1
(Mn)

40 5
40.5 110
40.2
39.9 110
40.0
108
108
106 106
38.0
105
103
36.0

100
34.0 European Euro area United Germany Spain France Italy
Union (27) (16) Kingdom
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

S
Source: INE andd ACF Research
R h S
Source: Ameco
A andd ACF R
Researchh

Ahorro Corporación Financiera, S.V., S.A. 38

 June, 2010

Population
p and employment
p y ((II):
) Population
p estimates

` Population growth is expected to slow down in the short, medium and long term.
` Immigration is the key
` The
h annuall net influx
i fl off immigrants
i i has
h already
l d fallen
f ll to 50,000,
0 000 down
d from
f c. 600,000
600 000 in
i the
h recent years.
` In 1Q2010, the net influx increased by 5.8% to 22,800.
` Excluding immigration, the population in Spain may fall to c. 35Mn by 2050e according to EuroStat.

Spain: Immigration trend Europe: Population estimates

800 20 115 113

Annual immigrants flow (LHS)
% inc. (RHS) 110
700 110
0 108 108

600 105
-20 100

(Base 1100: 2009)

500
100
(0000)

400 -40
40 98

(%))
95

300
-60 90

200 88
Spain UE 15 87
85
-80
80
100
80
0 -100 2030e 2050e 2030e 2050e
2002 2003 2004 2005 2006 2007 2008 2009 Zero inmigration

Source: INE and ACF Research Source: Ameco and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 39

 June, 2010

Population
p and employment
p y ((III):
) Active p
population
p

` Active population: growth rate declined to –0.4% in 2009 from 2.9% in 2008.
` Activity rate stands at 59.8% (in 1Q10).
` Since
Si 1991,
99 activity
i i rate increased
i d 9.1pp.
9

Spain: Active population Activity rate by age group

90.0 85.3
61 6
Activity rate (LHS) Active population (% inc.) (RHS) 80.0
59 5
5
4 4 70.0
57 63.6
3 4 59.8
3 3 60.0
55 3
3
3 3
2 50.0
2
%)

%)
53

%)
(%

(%

(%
2 2 2 2 2 2 40.0
51 1 1 1
1 1 1 30.0
1 1
49 0 21.4 21.2
20.0
47 0 0 0
10.0
45 -1
0.0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Average 16 to 19 yrs. 20 to 24 yrs. 25 to 54 yrs. More than 55 yrs.

S
Source: INE andd ACF Research
R h S
Source: INE andd ACF Research
R h

Ahorro Corporación Financiera, S.V., S.A. 40

 June, 2010

Population
p and employment
p y ((IV):
) Employment
p y

` Number of employed has already declined by –10.2% since 4Q07, to 18.4Mn, after a +29.7% in the 2000-2007 period.
` Unemployed stand at 4.6Mn according to EPA (Active Population Survey) implying an unemployment rate of 20.0% by 1Q10.

Spain: Employment and unemployment Unemployment rate by age group

25,000 30 70
Employed (LHS) Unemployed (LHS) Unemployment rate (RHS)
59.8
2424 25 60
20,000 23
21 21 21 22
20 20 20 20
19 20 50
18 18 18
15,000 17 17 17
16
15 15
14 40 36.5
(0000)

13

(%)
15
12

%)
(%
12 11
10,000 11 11
30
9 8 9 10
20.0 18.7
5,000 20
5 13.1

10
0 0
1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

0
Average 16 to 19 yrs. 20 to 24 yrs. 25 to 54 yrs. More than 55 yrs.

Source: INE and ACF Research Source: INE and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 41

 June, 2010

Population
p and employment
p y ((V):
) Employment
p y ((cont.))

` Hitting the bottom of downtrend?

` The number of employed declined –3.6% yoy by 1Q10, while unemployed figure increased +15.0%, showing an
improvement from prior quarterly figures.
` On a quarterly basis, the number of people employed declined by –1.3%.
` 4Q08:–3.9%, the worst.

Spain: Employment and unemployment, annual trend Spain: Employment and unemployment, quarterly trend
8 100 5 30

4
6 80 20
3
4
60 2
10

(% quarteerly increase)

(% quarteerly increase)
2
(% annuaal increase)

(% annuaal increase)
1
40
0 0 0

20 -1
-2
-10
-2
0
-4
-3
-20
-6 -20
-4

-8 -40 -5 -30
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10

1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
Active population (LHS) Employed (LHS) Unemployed (RHS) Active population (LHS) Employed (LHS) Unemployed (RHS)

S
Source: INE andd ACF Research
R h S
Source: INE andd ACF Research
R h

Ahorro Corporación Financiera, S.V., S.A. 42

 June, 2010

Population
p and employment
p y ((VI):
) Unemployment
p y rate

Unemployment rate per region (1Q2010)

30
27.7
27.2

25
23.5 23.2
23.0
22 4
22.4 22 4
22.4
21.6
21.0
20.0
20
17.9
16.6 16.2
15.9
15.2 15 5
15.5 15.2
15 14.5
(%)

12.3
10.9

10

0
Castillla-La Mancha

Extremadura

Madrid

Murcia

Melilla
País Vasco
Spain

Andalucía

Aragón

Cantabria

Castilla y León

Cataluña

Valencia

Galicia

Navarra

La Rioja

Ceuta
Asturias

Baleares

Canarias

Source: INE and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 43

 June, 2010

The housing
g market ((I):
) Demand

` Number of households may increase by an average of 200,000/250,000 per year in the next five years, to 18.3Mn in 2015e,
vs. 450,000 per year in 2000-2009.
` Population may only grow by +0.5% per annum vs. an average of 1.5% in 2000
2000-2009
2009
` Number of persons per household may decline to 2.5 in 2015e vs. 2.6 in 2008 and 3.2 in 1996
` Foreign investment would represent some €4.5bn or 0.5% of GDP implying 30,000/40,000 houses acquired per year.
` Average
g investment in 2000-2009: 0.7% of GDP or €5.5bn.

Spain: Population and household trend Spain: Foreign investment in residential property

50.0 3.8 1.0 80

45.0 3.6 0.9

60
40.0 0.8
3.4
35.0 0.7 40
3.2
30.0 0.6
30
3.0 20
(Mn)

25.0

(%)

(%)
0.5

(x)
2.8 0
20.0 0.4
2.6
15.0 0.3 -20
2.4
10.0 0.2
-40
5.0 2.2 0.1

0.0 2.0 0.0 -60

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Households (LHS) Population (LHS) Av. persons per household (RHS) % GDP ((LHS)) % inc. ((RHS))

Source: INE , Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 44

 June, 2010

The housing
g market in Spain
p ((II):
) Dwellings’
g breakdown

Total dwellings: breakdown by use Total dwellings: breakdown by ownership

90 90
82.2
79.8 78.3
80 80
73 1
73.1
70.8
70 68.2 67.7 70
63.4
60 60

50 50
(%)

(%)
40 40
30.1
30 30
20.8
20 17.0 16.0 16.3 14.8 16.2 20 15.2
12.9 12.7 11.4
10 75
7.5 10 65
6.5 61
6.1 65
6.5 65
6.5

0 0
Main residence Secondary dwellings Vacant dwellings Owned Rented Other
1970 1981 1991 2001 1970 1981 1991 2001

Source: Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 45

 June, 2010

The housing
g market ((III):
) Supply
pp y

` Housing starts dropped by –54% in 2009, after a –42% in 2008, to 159,000 units.
` Number of government subsidised houses (VPO) has historically increased its weight in economic downturns.
` VPO
O starts declined
d li d byb –13%
3% in
i 2009 (+9%
( 9% in
i 2008).
2008)

Spain: Housing starts trend Spain: Housing starts vs. dwellings stock trend
800 70 900 4.0
64

700 59 60 6060 60
800 3 3 3 3 3.5
57 60 3
53 3 3
51 700 3
600 50 3.0
50 3
45 3
600
500 40 2 2.5
36 40 2
(thousands)

(thoousands)
500 2
33 2

(%)
400 2 2

(%)
30 2 2.0
28 2 2
27 26 30 400 2
2 2 1
300 24 23 22 1 1 1
22 1.5
20 20 21 20 300 1 1 1
20 1 1
200 14 14 1.0
11 12 10 11 13 200 1 1 1 1
9 9 8
100 10
100 0.5

0 0 0 0.0
1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010e

2012e

2014e

1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010e
2012e
2014e
Free housing starts (LHS) VPO starts (LHS) VPO starts (as % of total) (RHS) Housing starts (LHS) Net increase in dwellings (LHS) Net increase in dwellings (%) (RHS)

S
Source: Bank
B k off Spain
S i andd ACF Research
R h S
Source: Bank
B k off Spain
S i andd ACF Research
R h

Ahorro Corporación Financiera, S.V., S.A. 46

 June, 2010

The housing
g market ((IV):
) Supply
pp y ((cont.))

` The dwelling stock may grow at the slowest rate of the last 30 years in 2010e, 2011e and 2012e.
` Housing starts would drop –82% from peak (2006) to through (2009e-2010e)

Spain: Dwelling stock trend Spain: Housing starts trend

30,000 4.0 800 40

29
28,000 26 25 25 30
3.33.3 3.3 3.4 3.5 700
3.2 19
3.0 3.0 17 17
26,000 3.0 15 14 20
11 13 11
2.7 3.0 600 10 9
8 6
24,000 5 4 4 4 10
2.5 2 3
0 -2
2.2 2.5 500 -3
22,000 -6 -5 -6 0
2

(thoousands)
2.1
(thoousands)

2.0 -10
1.9 -13
1.8 1.8 -16-15

(%)
20,000 2.0 400 -10

(%)
1.8
16
1.6 1.7 -19
16
1.6
1.5 1.5
18,000 1.3 -20
1.3 1.3 1.5 300
1.21.21.2
16,000 0.9 -30
0.9
1.0 200
0.70.70.60.7 -44
14,000 -40
0.5 100 -54
12,000 -50

10,000 0.0 0 -60

1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010e
2012e
2014e
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010e
2012e
2014e

Dwellings stock (LHS) Dwellings (% inc.) (RHS) Housing starts (LHS) Housing starts (% inc.) (RHS)

Source: Bank of Spain and ACF Research Source: Bank of Spain

Spain, Ministry of Housing and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 47

 June, 2010

The housing
g market ((V):
) Finished homes

Spain: Housing starts vs. finished homes per year Spain: Housing starts vs. finished homes (annual increase)

800 60

700
40

600

20
500
(tthousands)

400
0

(%)
300
-20
200

100 -40

0
-60
1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011e

2013e

2015e

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010
Housing starts Finished homes Housing starts Finished homes

Source: Bank of Spain, Ministry of Housing and ACF Research Source: Bank of Spain, Ministry of Housing and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 48

 June, 2010

The housing
g market ((VI):
) Transactions

` Total number of house transactions declined by –18% in 2009 (–33% in 2008).

` New house transactions posted a –28% decline (–19% in 2008).
` Second-hand
S d h d house
h transactions
i fall
f ll –4%
% (–46%
( 6% in
i 2008).
2008)
` 1Q10: +11.6% yoy!!!! Due to the VAT hike in July, 2010?
` Land bank sales dropped –28% in 2009 (–32% in 2008).

Spain: Sales of houses Spain: Land bank transactions

300,000 15 25,000 0
10 9
8 10
6 6 -5
250 000
250,000 5 -99
1 20,000
-2 0 -10
-13 -14
200,000 -6 -7 -15
-5 -15
15,000
-12 -10 -20 -21
150,000

(%)
-20

(%)
(x)

(x)
-23
-18 -15
-20 -25
25 -25
25
10,000
-20 -25
100,000 -28 -28
-25
-27 -25 -31 -31
-29 -32 -32 -30
-33 -33 -32 5,000 -34
50,000 -30 -35
-35
-35

0 -40
40 0 -40
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10

1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
New housing (LHS) Second hand housing (LHS) % inc. moving average (RHS) Land bank transactions (LHS) % inc. moving average (RHS)

Source: Ministry of Housing and ACF Research Source: Ministry of Housing and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 49

 June, 2010

The housing
g market ((VII):
) Prices

Spain: Price trend Spain: Price per square meter trend

2,500
Average Less than 2 years old
35
More than 2 yrs. Sponsored house
30 Less than 2 years old More than 2 yrs.
2,000 Land bank
25 Real price (Sociedad de Tasación) Average (Sociedad de Tasación)
Average
20
1,500

(€ per square m.)

15
(% inc.)

10

5 1,000

-5
500
-10

-15
1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010
Source: Ministry of Housing and ACF Research Source: Ministry of Housing and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 50

 June, 2010

The housing
g market ((VIII):
) Prices ((cont.))

Prices per region (December, 2009)

((€ per
p square
q meter))
Price per square meter (LHS) % inc. (RHS)
3,000 2

0.5 0
2,500

-2
2,000
-2.4
-2.8
-4

1,500
-4.9
-5.5 -6
-5.7
-6.1

1,000 -7.0
-7.0 -7.0
-7.3
-8
-7.7
-8.1 -8.2
-8.7
500
-10

-11.1
11.1
0 -11.3
11 3 -12
Castilla y León

Castilla la Mancha

País Vasco
Andalucía

Cantabria

Cataluña

Extremadura

La Rioja
Asturias
Madrid

Aragón

Valencia

Galicia

Murcia

Navarra
Baleares

Canarias

Source: Ministry of Housing and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 51

 June, 2010

The housing
g market ((IX):
) Affordability
y

` Affordability ratio declined to 27.9% of disposable income by March, 2010, down from 41.6% in December 2008.
` Interest rates evolution is key as mortgages are financed at variable rates (usually linked to 1yr. Euribor).

Spain: Affordability ratio evolution Spain: Household’s leverage: Genworth research

60.0 40

35
50 0
50.0

30

40.0
25

30.0 20
((%)

((%)
15
20.0

10

10.0
5

0.0 0
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Avg.
Affordabilty ratio Affordabilty ratio (inc. tax savings) <20% 20%-30% 30%-40% 40-50% >50% Avg.

Source: Bank of Spain and ACF Research Source: AHE and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 52

 June, 2010

The Spanish
p financial system
y ((I):
) Loan book g
growth

Spain: Loan growth by type of institution Spain: Loan growth by type of loan

30 40

25 30

20 20

15 10
(%)

(%)
10 0

5 -10

0 -20

-5 -30
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
System Banks Savings banks Total loans Commercial loans Secured loans Other term loans

Source: Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 53

 June, 2010

The Spanish
p financial system
y ((II):
) Loan book breakdown

Spanish banks: Loan book

Banks: 1992 Banks: December, 2009

Other loans
4% House acquisition Other loans
8% 2%
Other services Other services
28% 25%
Individuals-other House acquisition
10% 29%

Agriculture
A i lt
3%

Real estate
Real estate
4% Individuals-other
17%
8%
Construction Agriculture
Construction 1%
9%
7% IIndustry
d t
Industry 11%
34%

Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 54

 June, 2010

The Spanish
p financial system
y ((III):
) Loan book breakdown

Spanish savings banks: Loan book

Savings banks: 1992 Savings banks: December, 2009

Other loans
Other services
6% Other loans
14% Other services 2%
15%

Real estate
5%
House acquisition House acquisition
32% 41%
Real estate
Construction 20%
14%

Construction
8%
Industry Individuals-other
Industry Agriculture
g
12% Individuals-other 5% 1% 8%
Agriculture
3% 14%

Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 55

 June, 2010

The Spanish
p financial system
y ((IV):
) Market shares

Spain: Lending market shares trend Spain: Market shares by type of loan (September 2009)

70.0 70
64
61 60
60.0 58 60 58
55 54 55
54 54 54 53 53
52 51 50 52 51 52 51 52
50 49
50.0 47 46 50
45 44 44 45
44 44 43 43 44
40 41
39
40.0 40 37 37

% of total)
% of toal)

32
30

(%
30 0
30.0
(%

47 47 47 48 48
43 44 46 46 20
20.0
36 38 39 40 41 42
35 35
30 32
24 25 27 27 28 28
22 23 23 10
10.0

0
0.0
House Individuals- Industry Construction Real estate Other services
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
acquisition other
Banks Savings banks Banks Savings banks

Source: Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 56

 June, 2010

The Spanish
p financial system
y ((V):
) Asset q
quality
y

Spain: NPL ratio and coverage trend Spain: NPL ratio by type of loan (December, 2009)

10.0 450
12.0
9.0 400
10.6
80
8.0 10.11
10
350 10.0 9.7
9.0
7.0 8.6 8.5
300
7.8
6.0 8.0

(%)
250 6.9
5.0
(%)

(%)
200 6.0
40
4.0 55.115.0
5 05.1
51
4.5
150 4.2 4.1 4.14.0
3.0 4.0 3.4 3.2
2.9 3.1 3.13.13.0
100
2.0 2.5

1.0 50 2.0

00
0.0 0
0.0
1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Total loans House Individuals- Agriculture Industry Construction Real estate Other
System-NPL ratio (LHS) Banks-NPL ratio (LHS) Savings banks-NPL ratio (RHS) acquisition other services
System-Coverage (RHS) Banks-Coverage (RHS) Savings banks-Coverage (LHS) System Banks Savings banks

Source: Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 57

 June, 2010

The Spanish
p financial system
y ((VI):
) Loan loss p
provision

Bank of Spain Circular 4/2004 originally

Schedules for specific coverage Alpha and Beta parameters for generic coverage
With secured loans Without secured loans (%) Alpha Beta
Transactions with secured loans Businesses & Rest of Businesses & Rest of
No appreciable risk 0.00 0.00
on finished homes (%) Other transactions Bus. people (%) clients (%) Bus. people (%) clients (%)
Low risk 0.60 0.11
Up to 3 years 20
2.0 Up to 6 months 45
4.5 38
3.8 53
5.3 45
4.5
Low-medium risk 1.50 0.44
More than 3 years, but no more than 4 25.0 More than 6 months, but not >12 23.6 23.3 27.8 27.4
Medium risk 1.80 0.65
More than 4 years, but no more than 5 50.0 More than 12 months, but not >18 55.3 47.2 65.1 60.5
Mid-high risk 2.00 1.10
More than 5 years, but no more than 6 75.0 More than 18 months, but not > 25 81.4 79.3 95.8 93.3
High risk 2.50 1.64
More than 6 years 100.0 More than 24 months 100.0 100.0 100.0 100.0
Source: Bank of Spain
S
Source: Bank
B k off Spain
S i

Bank of Spain proposed Regulatory Changes

Schedule for specific coverage Haircuts by type of guarantee

(%)
(%) Finished housing (main residence) 20.0
Up to 6 months 25.0 undevelopable land, offices, business premises, and finished multiuse warehouses 30.0
More than 6 months, but no more than 9 50.0 Other types of finished housing 40.0
More than 9 months , but no more than 12 75.0 Plots,, urban lots,, and other real estate assets 50.0
More than 12 months 100.0 Source: Bank of Spain
Source: Bank of Spain

Ahorro Corporación Financiera, S.V., S.A. 58

 June, 2010

The Spanish
p financial system
y ((VII):
) Deposits
p g
growth

Spain: Deposit growth by institutions Spain: Deposit growth by type

25 35

30
20
25

20
15
15
(%)

(%)
10 10

5
5
0

-5
0
-10

-5 -15
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10

89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20

19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
System Banks Savings banks Residents deposits Sight deposits Savings deposits Time deposits

Source: Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 59

 June, 2010

The Spanish
p financial system
y ((VIII):
) Margins
g

Cost of deposits Yield on loans

6.0 12.0

5.0 10.0

4.0 8.0

6.0
3.0

(%)
(%)

4.0
2.0

2.0
1.0

0.0
0.0

Feb-03
May-03
Aug-03
Nov-03
Feb-04
May-04
Aug-04
Nov-04
Feb-05
May-05
Aug-05
Nov-05
Feb-06
May-06
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10
Jun-03

Jun-09
Sep-03
Dec-03

Jun-04
Sep-04
Dec-04

Jun-05
Sep-05
Dec-05

Jun-06
Sep-06
Dec-06

Jun-07
Sep-07
Dec-07

Jun-08
Sep-08
Dec-08

Sep-09
Dec-09

EU-Consumer loans EU-Residential mortgages

EU-Sight deposits EU-Time deposits -1yr. Spain-Sight deposits Spain-Time deposits -1yr. Spain-Consumer loans Spain- Residential mortgages

Source: Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 60

 June, 2010

The Spanish
p financial system
y ((IX):
) Margins
g ((cont.))

Mortgages: Loan book vs. back book Mortgages: Banks vs. Savings banks

7.0 0.5 7.0 3.0

6.0 6.0
2.5
00
0.0

5.0 5.0
2.0
-0.5 4.0
4.0
1.5
(%)

(%)

(%)

(%)
3.0
30
3.0
-1.0
1.0
2.0
2.0

-1.5 0.5
1.0
1.0
0.0 0.0

Feb-03
May-03
Aug-03
Nov-03
Feb-04
May-04
Aug-04
Nov-04
Feb-05
May-05
Aug-05
Nov-05
Feb-06
May-06
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10
0.0 -2.0
Feb-03
May-03
Aug-03
Nov-03
Feb-04
May-04
Aug-04
Nov-04
Feb-05
May-05
Aug-05
Nov-05
Feb-06
May-06
Aug-06
Nov-06
Feb-07
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10

Banks-Residential mortgages (LHS) Savings banks-Residential mortgages (LHS)

Mortgages -Front book (LHS) Mortagages -Back book (LHS) Difference (RHS) Banks-Spread (RHS) Savings banks-Spread (RHS)

Source: Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 61

 June, 2010

Spanish
p g
government and external debt ((I):
) Issues and amortizations

Public debt: oustanding debt and net issues Public debt: amortization schedule (as 30/04)
(%)
(€bn) (€bn)

80 15 15 16
250 140
Net issues
120 70 14
200 Amortizations Bonds and Short-term inst. (LHS)
Gross issues 100 60 Short-term inst. (LHS) 12
Gross issues (% inc.) (RHS) 10 9
150 80 % ot total debt (RHS)
50 8 10
60
100 40 6 8
40 5
30 5 6
50 20 3 4
3 3 3 3
20 3 4
0 2 1
0
-20
20 10 2

-50 -40 0 0

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021-2023
2024
2025
2029
2032
2037
2040
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010e

Source: Bank of Spain and ACF Research Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 62

 June, 2010

Spanish
p g
government and external debt ((II):
) Redemptions
p and g
gross issues

Public debt: monthly redemptions 2010e Public debt: gross issues 2010e

Redemptions Gross issues

Bills Bonds Currency short term long term total
January 9,661 16,144 January 9,144 9,643 18,787
February 11,627 February 9,523 8,859 18,382
March 9,263 64 March 10,219 11,087 21,306
April 12,288 2,083 April 9,244 5,469 14,713
M
May 9 251
9,251 M
May 9 842
9,842 6 499
6,499 16 341
16,341
June 8,180 June
July 7643 16,164 856 July
August 7858 August
September 5809 50 September
October 6600 October
November 7486 November
December 4573 December
Total 2010e 100,240 32,307 3,053 Total gross issues (Government forecast December 2009) 131,000 97,000 228,000
Pending redemptions (June to December) 48,150 16,164 906 Gross issues (January to may) 47,972 41,557 89,529
Source: Bank of Spain and ACF Research Gros issues as ((%)) 37 43 39
Gross issues pending (June to December) 83,028 55,443 138,471
Source: Bank of Spain and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 63

 June, 2010

Spanish
p g
government and external debt ((III):
) Public debt

Public debt (% GDP): comparison Eurozone: issuing needs

(%) 600 50
90 45
500 45 449 40
80 Eurozone Spain 400 35
400
344 30
70

(€bn)

(%)
300 28 25
26 233 27 26
24 23 20
60 200
22
19 15
116 17 17
50 90 10
100 65
38 36 29 39 5
40 0 0

Ireeland

Auustria

Frrance

Grreece
Netherlands

many
Porrtugal

Belgium
Finnland

Spain

Italy
Germ
S
30
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009e

2010e

Total gross issuance (2010e) Gross issuance (1Q10) % of total issuing needs

Source: Bank of Spain and ACF Research Source: Tesoro Público and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 64

 June, 2010

Spanish
p g
government and external debt ((IV):
) Public debt tenors

Spain: Pubic debt holders (Apr., 2010) Spain: Holdings trend

250,000

Non-residents Credit institutions 200,000

45% 32%

150,000

(€Mn)
100,000

50,000

Public Administrations
11% 0

Mar-10
Apr-10
Jan-10
Feb-10
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Other residents
12%
Credit institutions Public Administrations Other residents Non-residents

Source: Tesoro and ACF Research Source: Tesoro and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 65

 June, 2010

Spanish
p g
government and external debt ((V):
) International holders

Spain: International holders of public debt Spain: Public debt - Breakdown by countries

60,000 30
Investment and 25.3
pension funds Families, non-financial 50,000 25
17% corps. and rest
25% 19.6
40,000 20

13.7

(€Mn)
Insurance companies

(%)
30,000 15
5% 11.9

20,000 8.1 7.7 10

6.1
4.0 3.6
10,000 5

0 0

Francce

Asia, Africa annd

Americca

Rest of Europpe
Germanny

Rest of EU
U
Japaan

Itally

Beneluux
Financial institutions

others
18% Central banks
35%
Holdings (LHS) Non-resident market share (RHS)

Source: Tesoro and ACF Research Source: Tesoro and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 66

 June, 2010

Spanish
p g
government and external debt ((VI):
) External debt

Change in main sources of financing (net) Reported portfolio investment assets by economy of non resident issuer (2008)
(€Mn)
U.K.
200.000
Direct inv estment Portfolio inv estment 8% USA
Other inv estments* Bank of Spain
150.000 7%
Financial deriv ativ es

100.000

50.000

0 UEM
53%
-50 000
-50.000 Rest of the w orld
32%
-100.000
20008 (Jan. to

20009 (Jan. to
2007

2008

July)

July)

Source: Bank of Spain ACF Research Source: IiMF and ACF Research
Note: (*) Loans, deposits and temporary transactions

Ahorro Corporación Financiera, S.V., S.A. 67

 June, 2010

Spanish
p g
government and external debt ((VII):
) Cross country’
y holdings
g

Eurozone: Financial holdings

Issuer
(€bn) Austria Belgium France Germany Greece Ireland Italy Netherlands Portugal Spain Total
Austria - 4 25 77 8 16 21 20 2 13 186
Belgium 9 - 86 47 20 39 65 96 13 41 417
France 61 75 - 355 59 122 272 247 55 228 1,474
Germany 84 27 212 - 33 147 178 175 33 222 1,111
Greece 0 0 3 3 - 1 1 2 0 1 11
Ireland 11 13 88 96 1 - 138 50 60 71 528
Italy 21 10 123 109 23 59 - 75 9 33 462
Netherlands 18 26 132 135 19 42 83 - 9 64 527
Portugal 1 2 15 18 5 34 12 11 - 17 114
Spain
Spa 5 8 799 55 3 266 664 557 12 - 33100
EU 212 164 762 894 172 486 834 731 195 689 -
Source : IMF and ACF Research

Ahorro Corporación Financiera, S.V., S.A. 68

 June, 2010

ANALYST CERTIFICATION
Analysts’ certification: The following analysts hereby certify that the opinions expressed in this analysts’ report genuinely reflect their personal opinions. They also certify that they have not
received, receive, nor shall receive, either directly or indirectly, any remuneration whatsoever in exchange for offering a certain recommendation in this report: Marisa Mazo.
IMPORTANT DISCLOSURES
This document, and the data, opinions, forecasts and recommendations contained herein, have been drawn up by Ahorro Corporación Financiera, S.V., S.A. (hereinafter “ACF”), a
subsidiary of Grupo Ahorro Corporación.
ACF or any of the companies of Grupo Ahorro Corporación directly or indirectly owns more than 1% of the share capital of the company/companies whose shares are traded in any
organised market and which is/are analysed in this report: Not applicable.
Over the last twelve months, ACF or any of the companies of Grupo Ahorro Corporación has/have taken part as an underwriter and/or placement agent in initial public offerings and has
therefore received remunerations on that basis,
basis from the following company/companies which is/are analysed in this report: Not applicable.
applicable
Over the last twelve months, ACF or any of the companies of Grupo Ahorro Corporación has/have received remuneration for offering investment banking services from the following
company/companies which is/are analysed in this report: Not applicable.
Over the next three months, ACF or any of the companies of Grupo Ahorro Corporación expect to receive or shall endeavour to obtain remuneration for offering investment banking
services from the following company/companies which is/are analysed in this report: Not applicable.
Furthermore, ACF or any of the companies of Grupo Ahorro Corporación have signed liquidity contracts with the following company/companies which is/are analysed in this report: Not
applicable.
Grupo Ahorro Corporación has implemented internal procedures and control measures to prevent the flow of privileged information between its different areas of activity, pursuant to art.
83.1 of the Securities Market Act 24/1988 and Royal Decree 1333/2005, on the Securities Market, concerning market abuse.
RECOMMENDATIONS SYSTEM
Target prices and recommendations are set in accordance with the expected performance until the end of the natural year. From September onwards, target prices and recommendations
shall be offered for the end of the following year.
year The methodology used to calculate target prices is usually based on discounted cash flow. flow Recommendations are absolute.
absolute There are
three categories or types of recommendation: Buy, positive upside potential over the defined horizon (end of current or following year); Sell, negative upside potential over the defined
horizon (end of current or following year); Hold, upside potential close to zero over the defined horizon (end of current or following year). There are only two recommendations for
companies within the Micro Caps universe: Buy, positive upside potential over the defined horizon (end of current or following year); Sell, negative upside potential over the defined horizon
(end of current or following year).
As of today’s date, ACF’s total universe of companies under coverage comprises 51.0% Buy recommendations, 34.7% Hold recommendations and 14.3% Sell recommendations.
Furthermore, as of today’s date, ACF’s total universe of companies offered investment banking services comprises 43% Buy recommendations, 50% Hold recommendations and 7% Sell
recommendations.

Ahorro Corporación Financiera, S.V., S.A. 69

 June, 2010

LEGAL WARNING
This document, and the data, opinions, forecasts and recommendations contained herein, have been prepared by Ahorro Corporación Financiera, S.V., S.A. (hereinafter “ACF”), a subsidiary
of Grupo Ahorro Corporación, and are furnished purely as a guideline.
All the opinions and estimates included in this report are the personal technical opinion of the analyst on the date the report is issued, and are subject to modification without prior warning.
The fact that an analyst has been successful in past recommendations does not imply that he/she will continue to be successful in future recommendations.
This report must not, under any circumstances, be taken to be an offer for the purchase, sale, subscription or trading of securities or of other instruments. Any buy or sale decision by the
receiver in respect of securities issued by the company/companies analysed in this report, will have to be made taking into account public information concerning said securities, and, as the
case may be, considering the content of the prospectus pertaining to said securities registered at the National Security Market Commission (CNMV) – available at the National Security Market
Commission and the pertinent Market Governing Body, and also through the companies issuing the aforesaid securities.
Investors accessing this document must bear in mind that the securities or instruments to which it refers may not be appropriate for their investment targets or their financial position, and that
the historical results on the investments do not necessarily offer any guarantee of future results. Any investment decision thereon must be taken in accordance with the criteria of the investor
and/of the advisors deemed pertinent by the former.
ACF cannot be held responsible for any direct or indirect loss resulting from the use of the information furnished in this report.
The information included in this report has been obtained from what are considered to be reliable sources, and reasonable care has been taken to ensure that the information included and on
which this report is based is not inaccurate or unequivocal at the time of publication. Nevertheless, we cannot assure that the information is accurate and complete, and the information should
not be treated as if it were.
ACF or any other company of Grupo Ahorro Corporación, and its Board members, directors or employees, may (i) have a relevant commercial relationship with the company to which this
document refers; (ii) have a direct or indirect position in any of the securities or instruments issued by the company; (iii) trade with said securities or instruments independently or on behalf of
another even acting as market maker thereof and granting liquidity; (iv) have any kind of rights for the acquisition of securities issued by the analysed company or directly and fundamentally
another,
associated with same; (v) provide advisory services or similar services to the issuer of the securities or instruments, as part of its business purpose; (vi) have interests or carry out transactions
relating to the securities, whether prior to or subsequent to the publication of this report.
Employees of the sales departments of ACF or other companies of Grupo Ahorro Corporación can furnish clients with market comments in verbal or written form or investment strategies
which are not in keeping with the opinions expressed herein.
No part of this document can be (i) copied, photocopied or duplicated in any way, form or medium, (ii) redistributed, or (iii) quoted, without prior written permission of ACF. Distribution of this
report is not permitted in the United States, United Kingdom, and in all jurisdictions in which its distribution may be legally restricted.
ACF International, Inc., which is a member of FINRA / SIPC, distributes this document in the United States and therefore accepts all responsibility for the content thereof. Any investor of the United
States who wishes to carry out transactions with the securities which are the object of this report shall only be entitled to do so by contacting a representative of ACF International, Inc., and
never through any of the subsidiary companies abroad, including that responsible for analysis activities, Ahorro Corporación Financiera, S.V., S.A.
The remuneration system of the analyst(s) responsible for this report is based on a variety of criteria, including the revenues obtained by ACF over the financial year, and, indirectly, the results
of Grupo Ahorro Corporación, including those generated by investment banking activity, although the analysts do not receive remuneration based on the revenues from any specific
investment banking transaction.

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28046 Madrid (Spain) 08017 Barcelona (Spain) ACF International Inc. Boston, MA 02109 New York, NY 10017
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acanalisis@ahorro.com Corporación Financiera, S.V., S.A.)
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Ahorro Corporación Financiera, S.V., S.A. 70