Annual Report 2009 Banco Gallego

8/3/2019 Annual Report 2009 Banco Gallego

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2009 ANNUAL REPORT


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2009 ANNUAL REPORT


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2009 ANNUAL

TABLE OF CONTENTS

Letter from the Chairman 5

Financial highlights 9

2009 Management Report 13

Evolution of the world economy

Most important highlights for 2009

and prospects for 2010 37

Annual accounts 43

Audit report 175

Annual Corporate Governance Report 179

Further information 211


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Letter from the Chairman


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6 LETTERFROMTHECHAIRMAN

DearShareholders,

Theyear2009wasshadowedbytheglobaleconomicdownturn,oneofthedeepestandlongestinthehistoryofEurope.Thersthalfoftheyearsawonenegativegrowthresultafteranotherinthemaindevelopedcountries.Thisledtounprecedentedaid

packagesfromgovernmentsandcentralbankstostimulatetheeconomy.Theadopt-edmeasuresstabilizedactivityintheworldsleadingeconomiesandstoppedtheirfree-fall.

This,togetherwithaboostincondenceandatentativerevivalintrade,promptedmorepositivevibesregardingthewordeconomysgrowthprospectsfor2010.Growthratesareexpectedtovarywidelyamongcountriesandregions.TheGDPisexpectedtorise2%indevelopedeconomies,whileactivitywillgrow6%inemergingcountriesduetolivelydomesticdemand.

Inkeepingwiththeseveredowntrendswithwhichtheworldeconomyhashadtograp-ple,Spainended2009inrecessionforthesecondyearrunning.Duringthisperiod,theGDPshrankby3.6%,themostdramaticfallforhalfacentury.Themainfactorsbehindthisshrinkingweretheheavy5%fallinhouseholdconsumptionandthe15.3%

collapseininvestment,intermsofpropertyandgoodsandequipment.InsuchcircumstancestherecoveryprocessinourcountrywillbeslowerandmorefragilethanourneighbouringcountriesinEurope.Economicgrowthwillbesloweddownbytheriseinunemployment,whichattheendof2009was18.8%ofthework-ingpopulation,causedbytheheavypublicdecitwhichreached12%,andtheseverecrisisinthepropertysector.

Inspiteofthisbackground,whichwasparticularlycomplexforthenancialsector,BancoGallegopostedstrongeconomicresultsattheendof2009,withaprotbe-foretaxof17.05million,up12.54%onthepreviousyear.

Asregardsthemainmargins,allofthemrecordedsignicantincreases.Thenetinter-est 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%, reaching41.73million.Thiswasbroughtaboutbyactivemanagementofpricesandthe8.24%increaseinturnover,whichrecorded7.97billion.

Theexhaustivecostrestraintplan,inordertoadapttothecurrentmarketcontext,hasledustoreducepersonnelandadministrationcostsby1.67%versuslastyear,amountingto90,785thousand.

Strenuouseffortstoatalltimesmaintainabalanceriskinkeepingwiththecompa-nysexperienceandcapacitymeantthatBancoGallegoended2009witha 3.94%arrearsrate.Thiswasconsiderablybetterthantheaverageinthenancialsector.

Inaccordancewiththecautionrequiredinthecurrenteconomicsituation,thisal-lowedustoallocate43milliontoreinforceinsolvencyprovisionsandotherlossprovisions,whichtotalled133millionbytheendoftheyear.Itthereforerepresents

asignicantboosttotheBankscreditratingandcoverageratio,whichwillpushcon-dencelevelsfarenoughuptofacetheyear2010,basedona13.46%currentrating,whichis14%upon2008,an8.21%TIER1ratingandacoverageratioofover71%morethan105%excludingmortgagesecurities.


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2009 ANNUAL

LETTERFROMTHECHAIRMAN

Theresultsrecordedduringtheyearhaveallowedustopursuethestrategicobjec-tivesofimprovingandoptimizingourtechnologyplatform,withexcellentresults.WealsocontinuedwithoureffortsintheprocessofadaptingtoBaselII,whichwestart-edinpreviousyears,andimprovementsintheprocedurestomonitorcompliancewith

MIFID.During2009weimprovedtheresources,toolsandsystemsavailableinthemonitor-ingandfollow-upareastofacilitatemanagementinadifculteconomicclimate.TheupgradesintheNPLandarrearspositionmanagementapplicationareworthyofmen-tion.

ThePricingprojectalsodeservesparticularmention.Thiswillgiveourbankareport-ingsystemthatwillallowustoprovideabetterandmorecustomizedservicetoourcustomers.

Thisyearwealsoundertookamajorcorporatetransaction.WithCasersinvolvement,thecompanyBancoGallegoVidayPensioneswassetupinordertoprovideabetterandmorecomprehensivecustomerserviceandtocreatemorevalueforsharehold-ers.

Wecontinuetobecommittedtothedevelopmentofourworkers,thedrivingforcebehindcompetitiveness,providingmorethan600,000hoursoftrainingandfosteringtheuseofon-linetrainingthroughtheTrainingCamp.

Finally,IwouldliketothankeveryonewhoworksforBancoGallegoonceagainfortheirdedicationandcommitment,andhopethatwewillcontinuetocreateastrongerandmoreprofessionalbankinthefuture.

Iwouldliketogivespecialmentiontoourshareholders,andtheirvitalsupport,whichtheyhaveprovenonsomanyoccasions,andtoourcustomerswhotrust inBancoGallegoanditsgrowthprospects.

Kindregards,

JuanManuelUrgoiti


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Financial highlights


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10 FINANCIALHIGHLIGHTS

Balance sheet In thousands of euros

2009 2008 % Variation

Equity 258,126 248,658 3.81%

Gross loans and receivables 3,472,690 3,456,650 0.46%

Customer funds 3,168,319 3,016,460 5.03%

Prot/loss In thousands of euros

2009 2008 % Variation

Interest income 110,454 86,009 28.42%

Gross income 146,328 127,622 14.66%

Margin before provisions 41,729 23,642 76.50%

PBT 17,048 15,149 12.54%


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2009 ANNUAL

FINANCIALHIGHLIGHTS

Prot after tax for the year In thousands of euros

2006 20092007 2008

11,67611,483

13,67212,608

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0

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 20092007 2008

Gross loans and receivables In thousands of euros

3,472,6903,199,976 3,456,650

2,676,717

2006 20092007 2008

Managed volumes In thousands of euros

7,970,440

6,481,639

7,657,957 7,313,348

2006 2007 2008 2009

Customer funds In thousands of euros

2,606,050

3,023,646 3,016,460 3,168,319

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

14,000

12,000

10,000

8,0006,000

4,000

2,000

0


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2009 Management ReportIn accordance with the Spanish Companies Law and the Code ofCommerce, the Board of Directors of Banco Gallego, S.A., at ameeting on 4 February 2010, drew up the annual accounts andmanagement report for Banco Gallego for FY09, as well as theproposal for allocation of prot and surplus balances.

All of the Directors signed the nancial statement andmanagement report and the audit company Deloitte, S.L.subsequently checked them.


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14 2009MANAGEMENTREPORT

EQUITY

AttheendofFY09,BancoGallegosequitytotalled258,126thousand,once theprotallocationproposedtotheGeneralShareholdersMeetinghadtakenplace.Thisrepresenteda69.68%growthversusFY05.

Followingthe2009mergerbetweenBancoGallego(acquiringcompany)andGest21,S.L. Unipersonal and Galeban Energa S.A.Unipersonal (merged companies), theBanksreservesroseby3,337thousand.

Overthepastfouryears,BancoGallegosreserveshavemultipliedby2.03andtotalequityhasincreasedby69.68%withtheconsequentevolutioningrowthcapacity.

FollowingtheprotallocationproposedtotheGeneralShareholdersMeeting,BancoGallegowillhavetotalreservesof139,084thousand,representinga7.30%in-creaseonlastyear.

Evolution of equity

In thousands of euros

Variation 2009/2008

2009 2008 2007 Amount %

Capital 119,042 119,042 83,440

Reserves 139,084 129,616 85,532 9,468 7.30

Legal 12,824 9,995 8,734 2,829 28.30

Voluntary and other 71,884 65,245 57,906 6,639 10.18

Share premium 50,806 50,806 15,322

Revaluation 3,570 3,570 3,570

Total equity 258,126 248,658 168,972 9,468 3.81


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2009 ANNUAL

2009MANAGEMENTREPORT

Evolution of capital and reserves In thousands of euros

300,000

250,000

200,000

150,000

100,000

50,000

0

Reserves Capital2005

152,123

2006

83,440

68,683

159,705

2007

83,440

76,265

168,972

2008

83,440

85,532

248,658 258,126

2009

119,042 119,042

129,616 139,084

SinceFY03,BancoGallego,withapprovalfromtheGeneralShareholdersMeeting,hassharedoutdividendsamongitsshareholders.ThedividendsharedoutinFY09,chargedtoFY08,was0.29grosspershare.

Asfarascomputableequityisconcerned,calculatedinaccordancewiththeregula-tionsestablishedbytheBankofSpain,asat31December2009,thisamountedto435,218thousand.Theminimumequityamountrequiredis258,765thousandeuros,meaningthattheequitysurplusatthe2009year-endtotals176,453thou-sand.Inaccordancewiththeforegoing,theBanksBISratioasat31December2009is13.46%.

Shareholder structure

TheBankstotalnumberofshareholderswas504asat31December2009.Themost important shareholder is Caixa de Ahorros de Vigo Ourense e Pontevedra(Caixanova),whichowns49.84%.Thereare90shareholdersowningmorethan1,000shares,totalling99.71%ofthesharecapital.

AVERAGE TOTAL ASSETS

TheAverageTotalAssetsatthe2009year-endamountedto4,201,619thousand,comparedto4,052,436thousandforthepreviousyear.Thisrepresentsgrowthinabsoluteguresof149,183thousand,equivalentto3.68%inpercentageterms.Basedontheevolutionofequity,anintensivecommercialmanagementandthenet-workeffort,theBanksaveragetotalassetshaveincreasedby78.54%sincetheyear2005,whichrepresentsanincreaseof1,848,336thousandeurosanda16.26%averageannualgrowthrate.


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Evolution of average total assets In thousands of euros

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

2,353,283

2005

3,133,523

2006

3,862,116

2007

4,052,436

2008

4,201,619

2009

Managed turnover

ManagedturnoverinFY08amountedto7,970,440thousand,whichcomparedtothepreviousyearrepresents8.98%growth,equivalenttoa657,092thousandin-crease.Since2005theBanksmanagedturnoverroseby57.10%,i.e.a2,897,024thousandincrease.

Comparison of managed volumes In thousands of euros

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

5,073,416

2005

6,481,639

2006

7,657,957

2007

7,313,348

2008

7,970,440

2009


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2009 ANNUAL


Balance sheet total

Asat31December,thebalancesheettotalwas4,223,635thousand,representinga1.00%fallversusthepreviousyear.Theseresultsrepresenta1,477,458thou-sandgrowthversusFY05,i.e.a53.80%increaseand11.84%averageannualgrowth.

Evolution of Balance sheet total gures In thousands of euros

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

2,746,177

2005

3,511,682

2006

3,941,837

2007

4,266,322

4,223,635

2008 2009

Evolution of Balance sheet total ratios In thousands of euros

22,000

19,250

16,500

13,750

11,000

8,250

5,500

2,750

0

Per branch Per employee

16,829

2005

20,182

2006

20,111

2007

20,913 20,806

2008 2009

5,000

4,750

4,500

4,250

4,000

3,750

3,500

3,250

3,000

4,271

4,474

3,966

4,186

3,702

InFY09,productivityperemployeeroseby203thousandcomparedtothepreviousyear.


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MANAGED FUNDS

Asat31December2008,thetotalborrowingsthatBancoGallegomanaged,whichareshowninthebalancesheet,amountedto3,168,319thousand,whichrepre-sentsyear-on-yeargrowthof151,859thousand.Acomparisonofthe2009resultswith the 2005 results gives a 52.42% upturn, which represents an increase of1,089,592.


2009 2008% change

Amount % Amount %

Public administrations 116,477 3.68 125,824 4.17 (7.43)

Resident sector 2,677,104 84.50 2,358,055 78.17 13.53

Current accounts 411,488 12.99 328,978 10.91 25.08

Saving accounts 274,146 8.65 235,657 7.81 16.33

Fixed-term deposits 1,991,470 62.86 1,793,420 59.45 11.04

Non-resident sector 99,269 3.13 98,360 3.26 0.92

Current accounts 19,344 0.61 15,309 0.51 26.36

Term Deposits 78,838 2.49 82,365 2.73 (4.28)

Other accounts 1,087 0.03 686 0.02 58.45

Subordinated liabilities 201,000 6.34 177,000 5.87 13.56

Customer deposits 3,093,850 97.65 2,759,239 91.47 12.13

Temporary transfer of assets 32,794 1.04 201,079 6.67 (83.69)

Special and proceeds accounts 25,177 0.79 31,689 1.05 (20.55)

Customer funds 3,151,821 99.48 2,992,007 99.19 5.34

Valuation adjustments (*) 16,498 0.52 24,453 0.81 (32.53)

Total customer funds 3,168,319 100.00 3,016,460 100.00 5.03

(*) Refers to accrued interest, commissions and micro-hedging transactions

Thisgrowthwasrecordedinalloftheitemsintheresidentsector,aheadingwhichrepresents 84.50% of the customer funds total, posting a 13.53% growth, i.e.319,049thousanduponthepreviousyear.

Total managed funds

ThefundsthatBancoGallegomanagedthatarenotincludedonthebalancesheetduetobeinginvestmentfundsandprovidentandsavingsfunds(pensionschemes)amountto863,055thousand.Ifweconsidertheamountsfrominvestment,provi-dentandsavingsfundsandothernancialinstrumentsthatarenotshownontheBanksbalancesheet,thetotalmanagedfundsamountsto4,031,374thousand.

Thisis9.14%downonthe2009results,whichisequivalentinabsolutetermstoafallof337,543thousandinFY09.


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2009 ANNUAL



2009 2008 %variationAmount Amount

Total customer funds 3,168,319 3,016,460 5.03

Off-balance total: 863,055 677,371 27.41

Investment Funds 485,343 363,067 33.68

Provident and savings 49,757 39,284 26.66

Other nancial instruments 327,955 275,020 19.25

Total managed funds 4,031,374 3,693,831 9.14

InFY09,afterthenecessaryauthorization,BancoGallegoissuedsubordinatedebtamountingto50,000thousand,fullysubscribed,completingsaidissueon29Sep-tember2009.Theissueperiodistenyears,withthepossibilityofBancoGallegore-deemingthemearlyonanyduedatefromthefthyearonwards.

Evolution of customer funds In thousands of euros

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0

2,078,727

2005

2,606,050

2006

3,023,646

2007

3,016,4603,168,319

2008 2009


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Evolution of managed customer funds In thousands of euros

Term deposits 2,106,326 52.46%

Savings accounts 282,711 7.04%

Temporary transfer of assets 32,794 0.82%

Special and proceeds accounts 25,177 0.63%

Subordinated funds 201,000 5.00%

Investment funds 485,343 12.09%

Current accounts 503,813 12.55%

Provident and savings 49,757 1.24%

Other nancial instruments 327,955 8.17%

Doesnotincludevaluationadjustments.

Classication percentages by amounts of customer deposits in euros

No. ofaccounts

Amount

Up to 6,010 euros 68.07% 6.97%

6,011 euros to 30,050 23.69% 25.43%

30,051 euros to 60,101 4.81% 15.62%

More than 60,101 3.43% 51.98%

Total 100.00% 100.00%

LOANS AND RECEIVABLES

AttheendofFY09,loansandreceivablesamountedto3,472,690thousand,whichis16,040thousanduponthepreviousyear.Ifwedeductinsolvencyfundsandinter-estandfeeadjustments,wecancalculatethenetloansandreceivables,whichattheendof2009was3,382,790thousand,slightlyhigher(2,524thousand)thanthepreviousyear.


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2009 ANNUAL


Evolution of typical loans and receivables In thousands of euros

4,000,000

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0

2,080,170

2005

2,676,717

2006

3,199,976

2007

3,456,650 3,472,690

2008 2008

Net loans and receivables


2009 2008% change

Amount % Amount %

Public administrations 16,356 0.47 16,433 0.48 (0.47)

Resident sector credit 3,436,317 98.95 3,418,375 98.89 0.52

Commercial loans 156,498 4.51 211,635 6.12 (26.05)

Secured loans 2,126,458 61.23 1,993,286 57.66 6.68

Other long-term loans 902,764 26.00 1,020,321 29.52 (11.52)

Loans on demand and miscellaneous 104,890 3.02 114,455 3.31 (8.36)

Non-performing loans 145,707 4.19 78,678 2.28 85.19

Non-resident sector credit 20,017 0.58 21,842 0.63 (8.36)

Secured loans 14,923 0.43 16,600 0.48 (10.10)

Other long-term loans 3,393 0.10 4,145 0.12 (18.14)

Loans on demand and miscellaneous 415 0.01 697 0.02 (40.46)

Non-performing loans 1,286 0.04 400 0.01 221.50

Gross loans and receivables 3,472,690 100.00 3,456,650 100.00 0.46

Allowance for impairment losses (88,387) (76,633) 15.34

Interest and fee adjustments (1,513) 249 (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, reaching3,436,317thousandasat31December2009.


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Secured loans, which recorded2,141,381thousand, represent61.66%of grossloansandreceivables,whichis6.54%uponthepreviousyear,inspiteoftheslow-downinmortgagescausedbythedropinthesaleofhouses.Thecreditsandloansheading,with804,372thousand,represents23.16%ofthetotalgrossloansand

receivables.Since2005,theloansandreceivablesheadinghasgrownconstantly,increasingbyatotalof1,392,520thousand(66.94%inrelativeterms).

Allocation of gross loans and receivables In thousands of euros

Secured loans 2,141,381 61.66%

Credits and loans 804,372 23.16%

Leasing114,225 3.29%

Loans on demand and miscellaneous 109,221 3.15%

Non-performing loans 146,993 4.23%

Business portfolio 156,498 4.51%

Inaccordancewiththeperiodsuntiltheirmaturity,loansandreceivablesineuroshavethefollowingpercentagebreakdown:

2009

Up to 3 months 5.79%

Between 3 months and 1 year 12.62%

Between 1 and 5 years 14.99%

More than 5 years 66.60%

Total 100.00%

Out of the Banks total gross loans and receivables, as at 31 December 2009,24.42%wasxedrateandtheremaining75.58%wasvariablerate.

TheBankstrivestokeepabalancedriskinaccordancewiththeorganisationsexpe-rienceandskills,pursuingthefundamentalaimsofsolvency,protabilityandliquidity.


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2009 ANNUAL


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

Construction 21.78%

Real estate activities 27.64%

Transport and communications 4.33%

Hotel and catering1.48%

Trade and repairs 5.43%Food and drinks 2.48%

Agriculture, livestock and shing2.78%

Other services 19.85%

Other industries 10.59%

Chemical and metallurgy 3.64%

NON-PERFORMING LOANS

Inkeepingwiththecurrenteconomicclimate,andlikeintherestofthenancialsec-tor,BancoGallegosarrearshaverisen,althoughtoalesserextent.

As at 31 December 2009, non-performing loans recorded 57,396 thousand, ofwhich50,306weresecuredloans.Onthatdate,theinsolvenciesfundstotalled112,804thousand,ofwhich107,381thousandrelatedtoloansandreceivablesandsharesand5,423thousandtocorporaterisks.

Evolution of insolvencies funds In thousands of euros

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

45,296

2005

64,732

2006

79,122

2007

83,055

112,804

2008 2009


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Asat31December,non-performingloansrepresented3.94%ofdebtinstruments,with71.68%hedgingofthetotalnon-performingloans.Itshouldbenotedthatatthe2009year-end, hedge funds wereequivalentto 43.70%of GrupoBancoGallegosequity.

OPERATIONAL AREAS

Technology and processes

Thebankcontinuestofocusonimprovingandoptimisingthealignmentofpeople,processesandtechnologyinordertoguaranteeefciencyandtheestablishedserv-icelevels,adaptinginvestmenttothecurrentstateoftechnology,whichisdevelopingatafastpace,andtotheeconomicsituationthatwearefacing.Oncethesetstrate-gicgoalshavebeenachieved,wemustlookatdevelopingourplatformin ordertocontinuetosatisfyourinternalcustomersasadistinguishingfeatureofexternalcus-tomersatisfaction.

Themostimportantprocessesareclassiedinthefollowingareasofourbusiness:compliancewithregulations,internalcontrol,newchannels,bankingplatform,cus-tomerrelationships,managementinformation,andinfrastructureimprovements.

Aspartofcompliancewithregulations,theBankcontinuestakingmeasurestoadapttotheBaselIAccordstartedinpreviousyears,inordertofulltheBankofSpainsCircular3/2008.Thebankhasalsofocusedonseveralimprovementstotheproce-duretomonitorcompliancewithMIFID,includingcompliancewiththerequirementsofCircular6/2008andadaptationtootherregulatoryamendments.

During2009wecontinuedtoworktowardsimprovingtheresources,toolsandsys-temsavailableinthemonitoringandfollow-upareastofacilitatemanagementinadifculteconomicclimate.Theworkfocusedontwoareas:risksandothersupportapplications.Withinrisks,theupgradesinthebusinessapplicationsmostexposed

tothecurrentsituationareworthyofmention:NPLandarrearspositionmanage-ment;implementationofthenewintegratedguaranteemanagementsystemandad-aptationofriskinformationsystems,whichprovideinformationtohelpwithdecisionmaking.Regardingsupportapplications,themostnoteworthymeasuresincludeim-plementationofthecostmanagementandcontrolpurchasingsystem-allowingtheprocesstobeupgradedandautomated-andthetaxreportingproject.

Withinthenewchannelsarea,workhasbeenaimedattakingoutbankproductsandincreasingtheexistingfunctionstoconsolidateDigitalBanking.Asregardstheproc-essoftakingoutproducts,asignicantstepforwardhasbeenmadebyincludingxed-termdeposits.Themostimportantnewfunctionsfeatureinclusionofthepen-sionschemeandinsuranceposition,accesstotaxinformation,wiretransfersviatheBankofSpain(OMFs)andtheinclusionofalloftheBanksstatementsreducingqueriesandrequestsatbranchesandimprovementstodeliveryandmanagement

informationinstandardnotebooks.

Inthesecurityarea,constantupdatesarebeingmadetomitigatepotentialrisks,withtheinclusionofupgradestoanti-phishingsystemsandthelaunchofthecodecardforallcustomerswhocarryoutonlinetransactions.


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Theyearsresultshavebeenpositive,withan11%annualincreaseinactivecon-tracts,22%incustomeraccess,5%innumberoftransactionsundertakenand114%instatementqueries,withatotalof46,334statementqueriesinonemonth.

Thedevelopmentsinthebankingplatformareonschedule,withmorefunctionsbeing

addedtothenewnancialterminalwhichowns80%ofthemostsignicantfunctionsandbusinessprocesses.Theprocessofmigratingapplicationtothenewplatform(leasing,settlements,foreignandCIRBE)continues.

TheCRMtoolsarealsostillbeingupgraded.During2009thePricingproductwaslaunched,whichwillprovidetheBankwithaninformationsystemthatwillallowittogiveapersonalisedpricetocustomers.Thebasicfunctionsare:implementationofacalculationsystemthatuserscancongure,performanceofcalculationsatthecus-tomerandproductlevelandinclusionoftheinformationintheprocessoftakingoutproducts. The necessary developments have also been made to the CommercialmanagementandsupporttoolUlysses.

Thenalareaofimprovementintechnologyistheconstantupdatingofthetechno-logicalarchitectureusedasbusinesssupport,withtheaimofguaranteeingcontinu-

ityandsecurity.Progresscontinuestobemadetowardsprocessmanagementinordertohelpim-provetheBanksefciencyratio,withtwomainareasofaction:rationalisationofnetworkprocessesandstandardisationofprocessesincentralservices.

Human resources

BancoGallegohirespeoplewhoidentifywiththeBanksprocess,thatis,employeeswhoachieveresultsandcontributeaddedvaluethroughtheirwork.Peoplearethemostimportantaspectforourcompany,andweneedtoinvestinthemcoherentlyandstrategically.

During2009,trainingwasoneofthekeystoboostingcompetitivenessandawayofintegratingeachofourworkersinthecompany.Overall,62,500hoursoftrainingweretaughtduringtheyear.Toensurethebestresultsand efciency,theuseof onlinetrainingBGTrainingCampwaspromoted,asawayofallowingexibilityandguar-anteeingknowledgeacquisition.Inrelationtoclassroomandonlinetrainingtheassetmanagersmustbementioned,whocontinuetostrivetoupdatetheirknowledgeandboostservicequality,beingacknowledgedwithaofcialcerticateandalsotakingpartin maintenancetrainingsessions.Ourrecoveryspecialistshavereceivedspe-cictrainingasagroup.Thereserves(graduateswhohavepotentialbutnoexperi-ence)havecompletedathoroughtrainingplan,attheendofwhichtheBankandAl-calUniversityawardedthemaqualication.

Duetocurrentexibilityandadaptationrequirements,specialattentionhasbeenpaidtotheleaders,askeyplayerstoachieveresultsthroughtheirteams.Weusea

state-of-the-artmethodwithourexecutiveswhichcombinesclassroomtraining,settasksattheirworkstationandknowledgesharingandthinkingmeetingsinteams.Wealsousethepersonalcoachingmethod.Thisallowsourleaderstodeveloptheirmanagementskills:teamwork,peopledevelopment,peoplemanagementandlead-ership.

Humanresourceshasworkedindividuallywithsomeemployeestotry tomakethecompanysgoalscompatiblewiththeirpersonalinterests.Anearlyretirementsystemwaslaunched,aswellasapartialretirementsystemforpeoplewho,afteralong


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career,haveexpressedaninterestincontinuingtoworkwithBancoGallegoatare-ducedlevelofcommitment,allowingthemtoenjoymorepersonaltime.Moreprogresshasbeenmadeintheeldofworkplaceriskprevention,resultinginimprovedcondi-tionsforemployeesinthatarea.

Branches

Asat31December2009,BancoGallegosbranchestotalled203.Thesearebrokendownbyautonomousregionasfollows:

Autonomous region No. Branches

Galicia 135

Madrid 31

Castilla y Len 6

Pas Vasco 5

Valencia 5

Andaluca 4

Catalua 4

Asturias 3

Castilla-La Mancha 3

Aragn 2

Murcia 1

Navarra 1

Baleares 1

La Rioja 1

Cantabria 1

Total 203

ThePremierBankingchannelended2009withatotalof9branches(1inCatalonia,4inGaliciaand4inMadrid).

GROUP COMPANIES

Asat31December2009BancoGallegosdirectorindirectshareholdingsinGroupcompaniestotalled10,623,withthefollowingbreakdown:


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2009 ANNUAL


Solaqui Energa S.L.1%

Tornasol Energa S.L.1%

Solarana EnergaS.L.1%

Solnova Energa S.L.1%

Planasol EnergaS.L.1%

Solgomar Energa,S.L.50%

Fotonova Energa,S.L.

100%

Azimut Energa, S.L.99%

Solnova Energa,S.L.99%

Tornasol Energa,S.L.99%

Ondasol Energa,S.L.99%

Planasol Energa,S.L.99%

Solarana Energa,S.L.99%

Solaqui Energa, S.L.99%

Enerfn Enervento,S.A.30%

Alarde SociedadEnerga, S.A.

51%

Ondasol Energa S.L.1%

Azimut Energa S.L.1%

SociedadesFotovoltaicas

(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%

Banco Gallego, S.A.

Galeban Gestinde Riesgos, S.A.

100%

InmobiliariaValdebebas 21, S.L.

27.28%

CantabriaGeneracin S.L.

50.00%

GallegoPreferentes, S.A.

100%

Filmanova, S.L.14.73%

VisualmarkInternacional,

S.L.20%

GalenovaSanitaria, S.L.

50%

CSR InversionesSanitarias Sur, S.A.

8.45%

FilmanovaInvest, S.A.U.

100.00%

MetalplastC.F.E. S.L.

20%

Gala Domus, S.A.50%

EdicioVeganorte, S.L.

8.48%

MaewoInversiones, S.L.

48%

Decovama 21, S.L.20.30%

Leva-Yorma, S.L.49%

Ribera CasaresGolf, S.L.

49%

Petrus y BuenaGestin, S.L.

20%

InversionesValdeapa 21, S.L.

15.80%

VerumCarabanchel, S.A.

69%

Verum InmobiliariaUrbanismo y

Promocin, S.A.92%

Bajo Almanzorade Desarrollos

Inmobiliarios, S.L.36.28%

Gest Madrigal, S.L.100%

Agraria delGuadarrama, S.L.

33%

Berilia GrupoInmobiliario, S.L.

40%

InmobiliariaValdebebas 21, S.L.

13.64%

GestGalinver, S.L.

84.55%

Fegaunin, S.A.48%

DesarrollosUrbansticosSAU 6, S.L.

2%

InmobiliariaPanaderos 21, S.L.

15.01%

ArraimatPeninsular, S.L

7.42%

Pemapro, S.L.49%

Inveran Gestin, S.L.100%

Bco. Gallego VidPensiones, S.A.

Seguros y Reaseg.50.00%

TheinformationabouttheaforementionedcompaniesisgiveninmoredetailintheAnnualReport.

Galeban 21Comercial, S.L.U.

100%

Gest21 Inmobiliaria,S.L.U.

100%

ElicaGalenova, S.L.

33.33%


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INDIVIDUAL STATEMENT OF INCOME

Theindividualstatementofincomefor2009recordedaprotbeforetaxof17,048thousand, which is 1,899 more compared to 2008, i.e. an annual increase of12.54%.


Amount Variation

2009 2008 Absoluta %

Interest and similar income 209,982 231,305 (21,323) (9.22)

Interest and similar charges 99,528 145,296 (45,768) (31.50)

Interest income 110,454 86,009 24,445 28.42

Return on equity investments 1,815 6,808 (4,993) (73.34)

Commissions received 21,943 28,277 (6,334) (22.40)

Commissions paid 1,498 2,034 (536) (26.35)

Gains/losses on nancial assets and liabilities (net) 10,153 7,241 2,912 40.22

Exchange rate differences 371 289 82 28.37

Other operating income 4,082 2,378 1,704 71.66

Other operating costs 992 1,346 (354) (26.30)

Gross income 146,328 127,622 18,706 14.66

Personnel costs 59,784 59,885 (101) (0.17)

General administration costs 31,001 32,418 (1,417) (4.37)

Depreciations 13,814 11,677 2,137 18.30

Margin before provisions 41,729 23,642 18,087 76.50

Provisioning expense (net) 1,624 280 1,344 480.00

Impairment losses on nancial assets (net) 41,689 9,127 32,562 356.77

Other gains and losses 18,632 914 17,718 1,938.51

Prot/loss before tax 17,048 15,149 1,899 12.54

Income tax 5,372 2,541 2,831 111.41

Prot for the year 11,676 12,608 (932) (7.39)

Interest income

InFY09interestincomeposted110,454thousand,whichis28.42%upon2008,andinabsolutetermsrepresentsanincreaseof24,445thousand.Theinterestincomeheadingsareshownbelow.

TheinterestsandsimilarincomeobtainedduringFY2009totalled209,982thou-sand,withthefollowingbreakdown:


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2009 ANNUAL



2009 2008

Loans and advances to customers 191,072 212,675

Loans and advances to credit institutions 698 3,563

Debt securities 17,195 13,170

Adjustment of income due to hedges (631) (547)

Other income 1,648 2,444

Total interest and similar income 209,982 231,305

Interestandsimilarchargesduring2009totalled99,528thousand,withthefollowingbreakdown:


2009 2008

Bank of Spain and deposits from nancial institutions 15,408 36,800

Deposits from other creditors 80,239 93,190

Debt certicates including bonds 275

Subordinated liabilities 5,875 11,066

Adjustment of costs due to hedges (2,001) 3,965

Other interest 7

Total interest and similar charges 99,528 145,296

Evolution of interest income In thousands of euros

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

63,789

2006

75,259

2007

86,009

110,454

2008 2009


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Gross income

GrossincomeinFY09amountedto146,328thousand,withanincreaseof18,706thousand,i.e.14.66%inrelativeterms,comparedtotheresultsfor2008.

Equityinstrumentsatthe2009year-endfellby4,993thousand.InFY09,netcommissionsreceived,minuschargedcommissions,totalled20,445thousand, which represents 5,798 thousand less than the net commissions inFY08.

Financialtransactionsatthe2009year-endposted10,153thousand.

Operatingincome, which totalled4,082 thousand, experienced asignicantdropcomparedtothepreviousyear,of1,704thousand.Operatingchargesduetoinvest-mentintheDepositGuaranteeFundforBankingInstitutionstotalled992thousand.


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2009 ANNUAL


Evolution of gross income In thousands of euros

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

102,938

2006

120,692

2007

127,622

146,328

2008 2009

Margin before provisions

InFY09,themarginbeforeprovisions,calculatedbydeductingpersonnelcosts,gen-eraladministrationcostsanddepreciationsfromthegrossmargin,was41,729thousand,whichis76.50%upon2008andinabsolutetermsrepresentsannualgrowthof18,087thousand.

Personnel costs and general administration costs totalled 90,785 thousand in

FY09,down1,518thousand,duetothecostcontentionplaninordertoadapttothecurrenteconomicsituation.

Inaccordancewiththelabourcollectivebargainingagreementinforce,bankshaveundertakentopayemployeessupplementaryamountstothepensionschemesthattheypaytoSocialSecurityforretirement,widowhoodororphanageforallemployeesthathaveservedthecompanysincebefore8March1980.

TheBankhasallofitsactuarialobligationsforworkers,retiredpeopleandpeoplewhohavetakenearlyretirementcoveredunderseveralcontractsunderwrittenwithveinsurancecompanies.


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Evolution of personnel costs and general administration costs In thousands of euros

100,000

80,000

60,000

40,000

20,000

0

2007

52,704

80,680

27,976

2006

43,061

66,182

23,121

59,885

92,303

32,418

2008

59,784

90,785

31,001

2009

Personnell General costs

DepreciationsinFY2009amountedto13,814thousand,an18.30%increasecom-paredtothepreviousyear.

Prot for the year

Afterdeductingthechargestoprovisions(net)andimpairmentlossesonnancialassets (net)headings from the margin before provisions result and adding other

gainsand losses,theprotbeforetaxtotals17,048thousandatthe2008year-end,representinga12.54%increaseonthepreviousyear,whichinabsolutetermsisequivalenttoanincreaseof1,899thousandinthisheading.

Afterdeductingtaxes,whichstandat5,372thousand,theresultfortheyearis11,676thousand,whichis932thousandlessthanthepreviousyear,or7.39%inrelativeterms.

COMPREHENSIVE RISK MANAGEMENT

BancoGallegohasriskcontrolsystemsthatcoverallofitsactivities,mainlyfocussedonthecommercialbankingbusiness.

TheBanksriskcontrolpolicy,methodsandproceduresareapprovedbytheBoardof

Directorsandimplementedbythesubdepartmentsinvolvedintheirmanagement,inparticulartheRiskDivisionandAuditDepartment,underthesupervisionofspeciccommittees,whichtheBoardofDirectorsdelegates,suchastheExecutiveCommit-teeandtheAssetsandLiabilitiesCommittee.TheriskcontrolsystemsalsoincludeadviceandtheimplementationofareasforimprovementwhichtheGlobalRiskCom-mittee proposes, and supervision fromthe Banks internal auditarea, which ulti-matelyoverseescompliancewiththeBanksriskcontrolpolicies,methodsandpro-cedures.


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2009 ANNUAL


Credit risk

Creditriskreferstopotentiallossesduetothebreachofcontractualobligationsbyacustomeroracounterpart,aswellascreditimpairmentlosses.Thisriskisinherentinbankstraditionalbankingproducts(mainlynancialloans,creditsandguaranteesawarded)aswellas inothertypesofnancialassets(mainlydebenturestockandderivativesportfolio).

Inthecaseofnancingintheformofcredits,loansanddepositsgrantedtothirdpartiesthereisacreditriskduetothenon-recoveryoftheprincipal,interestandotheritems,inaccordancewiththecontracttermsandconditions.Inthecaseof-nancialguarantees,theriskisduetothecounterpartsbreachofitsobligationswiththirdparties,whichthebankwillhavetoassume.

Inordertoimproveriskmanagement,BancoGallegohasdevelopednewriskmanage-mentmodels.WithintheBaselframework,differentsectorialscorecardsareused,integratingtheproposeddigitalprocedurewiththepenaltysystem.

BancoGallegosBoardofDirectorsapprovescreditriskcontrolpolicies,methodsand

procedures.TheRiskManagementDepartmentandtheInternalAuditDepartmenthavethejobofensuringpropercompliancewiththosedirectives,makingsurethattheyareimplementedeffectively,andcheckingthemonaregularbasis.

TheBankappliespoliciesandproceduresthatlimitcreditriskconcentrationincoun-terpartsconsideredindividually,aswellasgroupsofcompanies.Riskconcentrationlimitsare established,consideringfactorssuchasthe counterpartsspecialistac-tivities,geographicallocationandothersharednancialcharacteristics.Asensitivityanalysisisconductedtoestimatetheeffectsofpossiblechangesindefaultratesforthedifferentriskconcentrationgroups.

Inresponsetomarkettrends,BancoGallegopaysspecialattentiontoarrears,whichgrewduring2009duetotheeconomicsituation,althoughatalesserratethanthesectorasawhole.ThishasledtheBanktoimplementvariousmeasuresandchang-

esinthecompanyinordertoprovidethedefaultriskcontroldepartmentswithmoreresourcesandultimatelystreamlinedefaultpaymentrecovery.Thisallowstherecov-eryprocedureinalloftheareasinvolvedtobefosteredandcoordinated,especiallythePrelitigation,RecoveryandLegalAdviceDepartments,andbyextensiontheentiresalesnetwork.


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Interest rate risk

Interestrateriskisdenedaspossiblenegativeuctuationsintheeconomicvalueofthebalancesheetornancialmargindueto variationsinmarketinterestrates.ThecontrolunitisresponsibleforputtingintopracticeproceduresthatensurethatBancoGallegopermanentlyfullstheinterestrateriskcontrolandmanagementpol-iciesthattheAssetsandLiabilitiesCommittee(COAPinSpanish)establishes.Byimplementingthesepolicies,theBankaimsto reduceinterestraterisksas faraspossible,strikingabalancewiththeBanksreturns.

Theanalysis,surveyandcontrolpoliciestopreventtheinterestrateriskthattheBankassumesmakeuseofsensitivityandscenarioanalysistechniques,andestab-lishtheappropriatelimitstoavoidexposuretoexcessiverisklevelsthatcouldsig-nicantlyaffectit.Theseanalysisproceduresandtechniquesarerevisedasoftenasnecessarytoensurethattheyworkproperly.

BancoGallegousescoveragetransactionsto individuallymanagetheinterestrateriskforalloftherelevantnancialinstrumentsthatmayexposeittoequallyrelevantinterestraterisks.Thisvirtuallyeliminatesthistypeofrisk.

Other market risks

BancoGallegodoesnotkeepforeigncurrencyforspeculativepurposes.Likewise,theBankdoesnotkeepnon-speculativeopenpositions(withoutcoverage)ofrelevantamountsofforeigncurrency.

Operational risk management

BaselIIdenesoperationalriskaspossiblelossesduetounsuitableorawedinter-nalprocesses,personnelandsystemsorduetooutsideevents.

Thisriskhasacquiredaspecicsignicancesinceitwascategorised,andBancoGallegoisawareofit,whichiswhyitdevotesresourcesandefforttoidentify,manageandmitigatetheeffectsofthisrisk.Inthissense,self-appraisalsystems,riskmapsandproceduralowshavebeenimplementedtomeasurethefrequencyandimpactofthistypeofriskandimprovecontrolandcoverageinmoreexposedareas.


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2009 ANNUAL


SIGNIFICANT EVENTS FOR THE BANK AFTER THE YEAR END

Afterthe2009year-endanduntilthepresentreportwasdrafted,norelevanteventshaveoccurredthatmayinuencetheBanksfutureevolution.

RESEARCH AND DEVELOPMENT ACTIVITIES

DuringFY2009,aseriesofprojectsweredevelopedtoimprovethecomputingplat-form.Meanwhile,paper-basedoperationalprocesseswerereplacedbyelectronicsys-temsinordertomaketheservicemoreefcientandstreamlined.

TREASURY SHARES

Asat31December2009,BancoGallego,S.A.owned66,119treasuryshares,witha6.01nominalvalueeach,representing0.33%oftheBankssharecapital.


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Evolution of the world economyMost important highlights for 2009and prospects for 2010


40/226

38 EVOLUTIONOFTHEWORLDECONOMY

GLOBAL CLIMATE

Theyear2009willgodowninhistoryastheyearwhentheworldeconomicdeclinehitlevelsnotseensincetheGreatDepression,withsimultaneousrecessioninmostoftheeconomiesaroundtheworld.Althoughthelatestresultsfor4Q09havenotyetbeenconrmed,itisforeseeablethattheworldeconomywillrecorda1.0%shrinkingoftheGDPversus2008,withdevelopedeconomiesfallingbyaround3%andemerg-ingeconomiesgrowingbyjust2%.

Inspiteoftheoverwhelmingdecline,fearsthattheglobalrecessionwilllasthavebeendispelledoverrecentmonths,becausethemeasurestostimulatetheeconomythatgovernmentsandcentralbankshaveadaptedhaveallowedactivitytostabiliseintheworldsleadingeconomies.WhereasinFY09themonetaryandscalstimuluspackageswerethekeytostoppingthefreefallofactivity,in2010domesticdemandwillbethepillarforeconomicgrowth.Therevivalofcreditchannelsandtherecoveryofthelabourmarketareextremelyimportanttosustaintherecoveryofactivity.

Theatnessofeconomicgrowthcausedasignicanteasingofination,whichevenbroughtaboutyear-on-yearfallsinpriceindexesindevelopedeconomiesforalargepartof2009.MostofthefallininationisexplainedbythedropinrawmaterialpricescomparedtotheaveragepricesinFY08andeven,althoughtoalesserextent,bytheweaknessofdomesticdemand.Inanyevent,duringthelastfewmonthsoftheyearinationstartedtopickup,promptedbytheincreaseinrawmaterialprices.


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2009 ANNUAL

EVOLUTIONOFTHEWORLDECONOMY

SPANISH ECONOMY

Eventhoughtheresultsforthenalquarterarenotyetknown,attheendof2009theSpanisheconomyrecordedthemostdramaticslumpinthecountrysrecenthis-tory.AlthoughthefactthattheGDPrecordeda3.5%fallisnodifferenttotherestoftheEurope,theextentofthefallindomesticdemandis,accountingforaround6.5percentagepointsoftheeconomyoverall.Theadjustmentprocessinthepropertymarkettogetherwiththeheavyslumpinthelabourmarketandpersistentcreditre-strictionsexplainthehighlevelsoffallsinhouseholdconsumptionandinthemaininvestmentheadings(bothinresidentialconstructionandcapitalgoods).

Theoffsettingofprivateinvestmentratiosjustiesthemainpartoftheadjustmentinthecurrentaccountdecit:theresultsinSeptembershowedthattheSpanishecon-omysborrowingneedstotalled61,300million,approximately5.8%oftheGDP,com-paredtoaround10%inmid-2008.Thiscurbisinkeepingwithafallintheaggregateinvestmentrateofalmost5pointsoftheGDP,asfaras25.4%.

Thepublicsectorattemptedtocushionthecollapseinprivateinvestmentwithinvest-mentandconsumptionstimulusplans,andalthoughitavoidedamoreseriousreces-sion,themeasuresadoptedwerenotenoughtolaythefoundationsforasustainedandindependenteconomicrecovery.

Publicfundsusedtorevivegrowthandguaranteestabilityfor thenancialsystemtogetherwiththeimpactthatautomaticstabilisersandtherecessionitselfhavehadonthedevelopmentofnon-nancialexpensesandincomehavereversedthepublicnancesurplusthatexistedatthestartofthecrisis.Theforecastsfor2009hintatdecitlevelsofaround11%oftheGDP,whereasin2007thesurpluswas2%.

Thedeclineinpublicaccountsexplainsthestabilisationoftheaggregatesavingintheeconomyatbelow20%oftheGDP,againstabackgroundofastrongrecoveryincorporatesavingsand,especially,householdsavings(witharateofaround18.8%ofgrossdisposable income,thehighestsincethestandardisedserieswasavailableandalmost7pointshigherthanrecordedayearago).ThegovernmentdecitinNo-vember2009surpassed6.5%oftheGDP.

Withalooktotheimmediatefuture,whenthemainEuropeaneconomieshavelefttherecessionbehind,the Spanisheconomyis stillrecordingquarterlycorrectionrateswhichhintataslowerandmoregradualrecoverythantheEurozoneaverage.Theeliminationoftheimbalancesacquiredinthelastexpansivecycle,suchasthesur-plusesaccumulatedinthepropertymarket,thehighlevelofhouseholddebtandthelossofthepricecompetitivenessofSpanishproductsabroad,willestablishthepathtoemerge from the crisis. 2010 isexpectedto end with another fall inthe GDP,around0.6%,causedbyweakprivateconsumptionandthestill-highlevelsofcorrec-tioninconstructioninvestment.


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40 EVOLUTIONOFTHEWORLDECONOMY

FINANCIAL MARKETS

The monetary policy has been a key factorin nancialmarket trendsthroughout2009.Theaggressivecutsintheinterventionratesofmaincentralbanksaroundtheworld(EuropeanCentralBank,FederalReserveandBankofEngland)to0%-1%inmostdevelopedeconomies,alongwiththeimplementationofunconventionalmone-tary policy managementprogramshave resulted in interest ratecurves withhighpeakedness,historicalinsomecases,betweenthe shorter-termperiods(2years)andthemedium/long-termperiodsoftheinterestratecurve(10years).

Intheeldofriskassets,gainswerealmostgeneralisedinFY09.Incorporatexedincome,theeasinginspreadsaffectedeveryrisklevel,withthefallofspreadsbeingparticularlysignicantinthehighyieldsegments.Onceagaintheactivismofcentralbanksandgovernmentsinmanagingthecrisishasbeenanimportantfactorinthiscreditmarkettrend.Thecentralbanksquantitativeprograms(programstobuyas-setsonthesecondarymarket)andtheguaranteesthatgovernmentshaveprovidedforissuancesinthenancialsectorhaveallowednancialmarketstograduallyopenupafterbeingalmostclosedfollowingtheLehmanBrothersbankruptcyinSeptember

2008.Anupturninriskappetitehasalsolteredintostockmarkets,whichended2009withrevaluationsofover20%indevelopedeconomiesandmeangainsofover50%inemergingcountries.Thisisarelativelypositivestartingpointintermsofvalu-ationand,especially,balancesheetgrowthforcentralbanks(unconventionalmone-tarypolicy)alongwithaseriesofscalstimuluspackagesthathaveprovidedsomesupportforeconomicactivityandcorporateprotwhichwerepracticallyfreefallingduringtherstfewmonthsof2009.

Theforeigncurrencymarkethasagainrecordedahighlevelofvolatility,shownintheevolutionofthedollarinrelationtotheeuro,whichendedtheyeararound1.45USD/EUR(similartothestartof2009),butwithavaluerangingfrom1.30USD/EURto1.51USD/EURTheyearcanbedividedintotwoclearly-differentiatedstages:arststageinwhichthemarketpunishedcurrenciesincountrieswhosecentralbanksweremoreaggressiveinadoptingmonetarystimulusmeasures(duetotheinationaryandcreditrisksthatthisinvolved),withthepoundandthedollarbeingtheworstaffected,andasecondstageinwhichthesustainabilityofpublicaccountsandtheirimpactongrowthplayedanimportantrole.Inthisregard,themaincurrencyaffectedwastheeuro,whichfell4%againstthedollarinDecemberalone.

Thelowinterestratesindevelopedeconomieswereacatalystforcarrytradestrate-gies,whichtargetedemergingcurrenciesthistime,asaresultofreferenceratesthathavestayedathigherlevelsandmacroeconomicforecastsofquickrecoveryintheirrespectiveeconomies,whichcauseda generalrevaluationinnancialassets,andalsoincurrencies.LatinAmericaisthebestexample:theBrazilianrealandChileanpesoappreciatedagainstthedollarbymorethan20%inFY09.


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EVOLUTIONOFTHEWORLDECONOMY

By2010atransitionisexpectedfromnancialmarketsbasedonexpansivemone-tarypoliciestowardsaclimateinwhichbasicvariablesrelatedtotheeconomiccycleandcorporateprotswillgainimportance.Inthistransactionanupturninvolatilityandareducedcorrelationbetweennancialassetpricesareexpected.

Asfarasthemonetarypolicyisconcerned,noincreasesininterventionratesareexpectedin2010,butagradualwithdrawalofthevariousmonetarypolicyprogramsisexpected.Thiscouldconsiderablypushuppressureontheshort-termyieldcurve(upto2years),whereasthemedium-andlong-termsoftheinterestratecurvecouldexperiencefurtherIRRrisescausedbyapossiblerevaluationinthesovereignrisk.

Onthecorporatexedincomeandequitymarkets,thebasicvariablesthatmusttakeoverfromthemonetarypolicymightnotbeenoughtojustifythevaluationsthatsomemarketareashavereached(highyieldcredit,small-capequity).Adjustmentstothecurrentvaluationlevelsarethereforelikelytobemade.

Finally,intheforeigncurrencymarket,thepossibilitythatthedollarwillcontinuetoappreciateisnotruledoutinlightofthedifcultiesthatsomeEMUcountriesmightfacewhenitcomestocorrectingtheirhighpublicdecitlevels.Thefactorthatcould

counteractthistrendis thedevelopmentof theFEDsmonetarypolicy.A potentialextensionofitssupportmeasurestothenancialsystemthroughbuyingassetscouldpromptanotherreductioninlong-terminterestratesintheUSandoffsettheappreciationoftheUSdollartowardstheendof2009.


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Annual accounts


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44 ANNUALACCOUNTS

Balance sheets as at 31 December 2009 and 2008 (Notes 1 to 3)


ASSETS 2009 2008 (*)

Cash and balances with central banks (Note 5) 70,506 65,659

Trading portfolio 2,914 1,825

Equity instruments (Note 8) 107

Trading derivatives (Note 10) 2,807 1,825

Other nancial assets at fair value through prot and loss 1,565 9,677

Debt securities (Note 7) 1,565 9,677

Available-for-sale nancial assets 201,919 440,300

Debt securities (Note 7) 164,194 411,820

Equity instruments (Note 8) 37,725 28,480

Loans and receivables 3,444,665 3,581,186

Loans and advances to other credit institutions (Note 6) 61,875 200,920

Loans and advances to other debtors (Note 9) 3,382,790 3,380,266

Held-to-maturity investments 302,538

Debt securities (Note 7) 302,538

Hedging derivatives (Note 10) 22,869 30,503

Non-current assets held for sale (Note 11) 1,838 523

Tangible assets 1,838 523

Shares (Note 12) 24,523 28,185

Associates 13,900 6,024

Group companies 10,623 22,161

Tangible assets (Note 13) 67,147 39,505

For own use 67,147 39,505

Intangible assets (Note 14) 16,339 16,657

Goodwill 2,359 2,359

Other intangible assets 13,980 14,298

Tax assets (Note 24) 39,073 46,943

Current 896 3,497

Deferred 38,177 43,446

Other assets (Note 15) 27,739 5,359

Other 27,739 5,359

Total assets 4,223,635 4,266,322

Memorandum

Contingent risks 245,692 257,185

Financial guarantees (Note 25) 49,242 53,481Technical guarantees 189,078 199,098

Assets pledged for third-party obligations 10 10

Other contingent risks 7,362 4,596

Contingent commitments 350,754 387,257

Drawable by third parties (Note 25) 318,458 349,708

Other commitments 32,296 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.


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2009 ANNUAL

ANNUALACCOUNTS

Balance sheets as at 31 December 2009 and 2008 (Notes 1 to 3)


NET LIABILITIES AND EQUITY 2009 2008 (*)

LIABILITIES


Trading derivatives (Note 10) 1,888 2,683

Financial liabilities at amortised cost 3,948,203 4,014,453

Deposits from central banks (Note 17) 406,033 264,593

Deposits from nancial institutions (Note 17) 365,546 725,537

Deposits from other creditors (Note 18) 2,941,711 2,806,215

Subordinate liabilities (Note 19) 201,431 178,556

Other nancial liabilities (Note 21) 33,482 39,552

Hedging derivatives (Note 10) 18,412 26,746

Provisions (Note 20) 7,306 3,799

Pension funds and similar obligations. 1,883

Provisions for contingent risks and commitments 5,423 3,799

Tax liabilities (Note 24) 1,583 1,574

Current

Deferred 1,583 1,574

Other liabilities 7,156 6,672

Rest (Note 16) 7,156 6,672

Total liabilities 3,984,548 4,055,927

NET EQUITY

Equity (Note 23) 262,530 251,484

Share capital 119,042 119,042

Paid-in capital 50,806 50,806

Reserves 82,148 70,229

Accumulated reserves 82,148 70,229

Less: treasury shares (1,142) (1,201)

Prot for the year 11,676 12,608

Valuation adjustments (Note 22) (23,443) (41,089)

Available-for-sale nancial assets (23,443) (41,089)

239,087 210,395

Total net equity 239,087 210,395

Total shareholders net equity and liabilities 4,223,635 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.


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46 ANNUALACCOUNTS

Statements of income for the years ended 31 December 2009 and 2008 (Notes 1 to 3)


Income (Expenses)

2009 2008 (*)

Interest and similar income (Note 26) 209,982 231,305

Interest and similar charges (Note 27) (99,528) (145,296)

Interest income 110,454 86,009

Return on equity instruments (Note 28) 1,815 6,808

Commissions received (Note 29) 21,943 28,277

Commissions paid (Note 30) (1,498) (2,034)

Gains/losses on nancial assets and liabilities (net) (note 31) 10,153 7,241


Other nancial instruments at fair value through prot and loss 1 (638)

Financial instruments not valued at fair value through prot and loss 8,576 488

Other (100)Exchange rate differences (net) 371 289

Other operating income (Note 32) 4,082 2,378

Other operating charges (Note 35) (992) (1,346)

Gross income 146,328 127,622

Administration costs

Personnel costs ( 33) (59,784) (59,885)

Other general administrative costs (Note 34) (31,001) (32,418)

Accrued (13,814) (11,677)

Tangible assets (Note 13) (5,521) (4,792)

Intangible assets (Note 14) (8,293) (6,885)

Provisioning expense (net) (note 12) (1,624) (280)Impairment losses on nancial assets (net) (41,689) (9,127)

Available-for-sale nancial assets (Note 7) (8,160) (780)

Loans and receivables (Note 9) (25,399) (8,347)

Shares (Note 12) (8,130)

Operating income (1,584) 14,235

Gains/losses due to write-off of assets not classied as non-current held for sale (Note 36) 18,854 914

Gains/losses on disposal of tangible assets (Note 13) 293 464

Gains/losses on disposal of equity investments (Note 12) 17,940

Other items 621 450

Gains/losses on non-current assets held for sale not classied as interrupted transactions (Note 13) (222)

Prot/loss before tax 17,048 15,149

Income tax (Note 24) (5,372) (2,541)

Prot for the year 11,676 12,608

Prot per share

Basic 0,5911 0,9089

Diluted 0,5911 0,9089

(*) 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.


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Statements of consolidated income and expenditure for the years ended31 December 2009 and 2008 (Notes 1 to 3)


FY FY

2009 2008 (*)

A) Prot or loss for the nancial year 11,676 12,608

B) Other consolidated income and expenditure 17,646 (22,423)

Available-for-sale nancial assets 25,209 (32,033)

Valuation gains/losses 24,652 (32,033)

Amounts transferred to the statement of income 557

Other reclassications

Cash ow hedges

Valuation gains/losses

Amounts transferred to the statement of income

Amounts transferred at the initial value of the hedged items


Net investment hedges in businesses abroad




Exchange rate differences




Non-current assets held for sale




Actuarial gains/losses in pension schemes

Entities accounted for using the equity method




Other consolidated income and expenditure

Income tax (7,563) 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 ending31 December 2009.


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Total statement of changes in net equity for the years ended31 December 2009 and 2008 (notes 1 to 3)


Statement for the year ended31 December 2009

EquityValuation

adjustmentsTotal net

equitySharecapital

Reservesand sharepremium

Prot forthe year

Treasuryshares

Totalsharehold-ers funds

Final balance as at 31 December 2008 119,042 121,035 12,608 (1,201) 251,484 (41,089) 210,395

Adjustment due to change in accounting principles

Adjustment due to errors

Initial balance adjusted 119,042 121,035 12,608 (1,201) 251,484 (41,089) 210,395

Total consolidated income/expenditure 11,676 11,676 17,646 29,322

Other changes in net equity 11,919 (12,608) 59 (630) (630)

Merger 3,337 3,337 3,337

Dividend distribution/Shareholder remuneration (4,026) (4,026) (4,026)

Transfers between net equity headings 8,582 (8,582)

Transactions with equity instruments (net) 59 59 59

Balances as at 31 December 2009 119,042 132,954 11,676 (1,142) 262,530 (23,443) 239,087

Statement for the year ended31 December 2008 (*)

EquityValuation

adjustmentsTotal net

equitySharecapital

Reservesand sharepremium

Prot forthe year

Treasuryshares

Totalsharehold-ers funds

Final balance as at 31 December 2007 83,440 76,420 13,672 (533) 172,999 (18,666) 154,333

Adjustment due to change in accounting principles

Adjustment due to errors

Initial balance adjusted 83,440 76,420 13,672 (533) 172,999 (18,666) 154,333

Total consolidated income/expenditure 12,608 12,608 (22,423) (9,815)

Other changes in net equity 35,602 44,615 (13,672) (668) 65,877 65,877

Capital increases/reductions (Note 23) 35,602 35,484 71,086 71,086

Dividend distribution/Shareholder remuneration (4,026) (4,026) (4,026)

Transfers between net equity headings 9,646 (9,646)

Other (515) (515) (515)

Transactions with equity instruments (net) (668) (668) (668)

Balances as at 31 December 2008 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 ending31 December 2009.


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Cash ow statements for the years ended 31 December 2009 and 2008 (Notes 1 to 3)


FY09 FY 2008 (*)

A) Cash ows from operating activit ies 313,654 (29,718)

1. Prot for the year 11,676 12,608

2. Adjustments to calculate cash ows from operating activities:

(+) Amortisation (Notes 13 and 14) 13,814 11,677

(+/) Other revisions 22,796 11,483

3. Net increases/decreases on operating assets:

(+/-) Trading portfolio (Notes 8 and 10) (1,089) 590

(+/-) Other nancial assets at fair value through prot and loss (Note 7) 8,113 10,637

(+/-) Available-for-sale nancial assets (Notes 7 and 8) 230,221 (86,071)

(+/-) Loans and receivables (Notes 9 and 6) 111,122 (233,111)

(+/) Other operating assets (8,191) (23,320)

4. Net increases/decreases on operating liabilities:

(+/-) Trading portfolio (Notes 8 and 10) (795) 1,324

(+/-) Financial liabilities at amortised cost (Notes 17, 18, 19 and 21) (61,794) 283,489

(+/) Other operating liabilities (12,219) (19,024)

B) Cash ows from investing activities (337,484) (20,275)

1. Payments:

(-) Tangible assets (Note 13) (32,249) (8,909)

(-) Intangible assets (Note 14) (7,975) (8,778)

(-) Shares (Note 12) (4,508) (3,000)

(-) Held-to-maturity investments (Note 7) (302,538)

2. Collections:

(+) Tangible assets (Note 13) 356 412

(+) Shares (Note 12) 9,430

C) Cash ows from nancing act iv ities 28,677 65,690

1. Payments:

(-) Dividends (Note 3) (4,026)

(-) Other payments related to nancing activities (Note 19) (17,297) (5,396)

2. Collections:

(+) Capital issue (Note 23) 71,086

(+) Subordinate liabilities issue (Note 19) 50,000

D) Net increase (reduction) of cash and equivalents (A + B + C) 4,847 15,697

E) Cash and equivalents at start of period (Note 5) 65,659 49,962

F) Cash and equivalents at end of period (d + e) (Note 5) 70,506 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 ow statement for the year ending 31 December 2009.


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BANCO GALLEGO, S.A.

Annual report for the year ended 31 December 2009

1. Introduction, basis for presentation of the annual accounts andother information

1.1. Introduction

BancoGallego,S.A.(hereinaftertheBank),isaprivatenancialinstitutionsubjecttothelegislationandregulationsgoverningbanksoperatinginSpain.TheBankwassetupasalimitedliabilitycompanyinSpain,foranindeniteperiod,on13May1991.Itsactivitiesbeganon16December1991,underthecorporatenameBanco21,S.A.andthischangedtothecurrentnamebymeansofanagreementattheSpecialGen-eralShareholdersMeetingheldon24October1998,followingthemergerunder-takeninthisyear,whichismentionedfurtheron.

Itsmainactivityistheundertakingofalltypesofbankingtransactions.Asat31De-cember2009,theBankhad203ofces(204asat31December2008),ofwhich135arelocatedinGalicia,31intheMadridRegion,5 intheBasqueCountry,6 inCastile-Len,5intheValenciaRegion,3inAsturias,2inAragn,1inNavarre,4inAndaluca,1intheBalearicIslands,1inLaRioja,1inCantabria,3inCastile-LaMan-cha,1intheMurciaRegionand4inCatalonia.

TheBankalsoownsdifferentsharesincompanies(dependentandassociate)thatundertakeindustrialandcommercialactivities.

TheBanksregistrationnumberis46inBankofSpainsSpecialRegister.ThearticlesofassociationandotherpublicinformationontheBankcanbefoundbothontheBanksofcialwebsite(www.bancogallego.es)andattheirregisteredofces.

BancoGallego,S.A.andBanco21,S.A.mergedin1998whenBanco21,S.A.tookoverBancoGallego,S.A,acquiringenmassethecorporatenetworthoftheacquiree(whichcloseddown)andthesubsequentuniversalsuccessionofitsrightsandobli-gationsbytheacquiringentity.Thepublicmergerdeedsweregrantedon2December1998andwereenteredintheCompaniesRegisteron9December1998.Inthisyear,andoncethemergerbetweenthetwoentitieshadbeenconcluded,thesharecapitalwasincreasedby90,132thousand,whichwaswhollysubscribedbyCajadeAhor-rosMunicipaldeVigo-Caixavigo(currentlycalledCaixadeAhorrosdeVigo,OurenseePontevedra-Caixanova),meaningthatattheendof2009and2008theBankformedpartoftheCaixanovaGroup(seeNote23).

TheBanksregisteredaddressisatCalleHrreo,38,SantiagodeCompostela.

BancoGallegosGeneralShareholdersMeetingheldon11April2008adoptedtheresolutiontodelegatetheBanksBoardofDirectorsthepowertoincreasethesharecapitalononeorseveraloccasionsandwithinamaximumof5yearsfromwhentheresolutionisadopted,uptoalimitof41,720thousand.


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Atthemeetingon24November2008,inaccordancewitharticle153.1b)oftheSpanishCompaniesLawandtheauthorisationgrantedattheBanksGeneralShare-holdersMeeting,heldon11April2008,theBanksBoardofDirectorsadoptedtheresolutiontoincreasethesharecapitalby35,602thousand(5,923,880shares

withanominalvalueof6.01pershare)andwithasharepremiumof5.99pershare,withatotalamountoftheincreaseof71,086thousand.

1.2. Basis for presentation of the nancial statement

TheBanksDirectorsdrewuptheBanksnancialstatementforFY08attheBoardofDirectorsMeetingheldon10March2009,inaccordancewithBankofSpainCircular4/2004,22December,amendedbyBankofSpainCircular6/2008,26November,suchthatitgivesatrueandfairviewoftheBanksnetequityandnancialpositionasat31December2008andoftheresultsofitstransactions,changesinitsnetequityandcashowsgeneratedduringtheyearendedonsaiddate.Themainac-countingprinciplesandpoliciesandvaluationcriteriastatedinNote2areappliedinthepreparationofthenancialstatement,whichwasapprovedattheGeneralShare-holdersMeetingheldon19May2009.

TheBanksDirectorsdrewuptheBanksnancialstatementforFY09attheBoardofDirectorsMeetingheldon4February2010,inaccordancewithBankofSpainCircu-lar4/2004,amendedbyCircular6/2008,26November,suchthatitgivesatrueandfairviewoftheBanksnetequityandnancialpositionasat31December2009andoftheresultsofitstransactions,changesinitsnetequityandcashowsgeneratedduring theyearendedon said date. The nancialstatement has been drawnupbasedontheBanksaccountingrecords.ThisnancialstatementwillbesubmittedforapprovalattheBanksGeneralShareholdersMeeting.Itisthoughtthatitwillbeapprovedwithoutanychangesbeingmade.

Inaccordancewithlegislationinforce,theBanksDirectorshavealsodrawnupBan-coGallegosconsolidatednancialstatementfortheyearended31December2009,whichcoversalloftheGroupscompaniesbyapplyingthetechniquesofintegration

asapplicable,inaccordancewitharticle42oftheCodeofCommerce.Asconcludedfromthecontentsofsaidconsolidatednancialstatements,whichwerepreparedinaccordancewiththeEuropeanUnionsInternationalFinancialReportingStandards,GrupoBancoGallegosassetsandconsolidatednetequitytotalled4,254,899thou-sandand238,184thousand,respectively,attheendofFY09(4,382,698and258,710thousandeurosrespectivelyattheendof2008),andtheconsolidatednetprotforFY09attributedtotheholdingcompanytotalled7,420thousand(9,227thousandinFY08).


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1.3. Estimates made

IntheBanks2009and2008nancialstatements,estimatesthattheBanksSeniorManagementmade,whichtheDirectorssubsequentlyratied,havebeenusedocca-sionallytoassesssomeoftheassets,liabilities,income,expensesandcommit-

mentsthatarepostedinit.Theseestimatesmainlyreferto: Impairmentlossesoncertainassets.

Theassumptionsusedintheactuarialcalculationsofliabilitiesandcommitmentsforpostemploymentcompensationandotherlong-termcommitmentsmadewithemployees.

Theusefullifeoftangibleandintangibleassets.

Thefairvalueofcertainunlistedassets.

Despitethefactthattheaforementionedestimatesweremadeaccordingtothebestinformationavailableon theeventsanalysedasat 31December2009and2008,eventsthatmaytakeplaceinthefuturecouldrequiretheseestimatestobemodiedsignicantly(upordown)infutureyears.Ifthiswerethecase,itwouldbedoneinaccordancewithBankofSpainCircular4/2004,22December(acknowledgingchang-estothestatementofincomefortheyearsinquestion).

1.4. Agency contracts

NeitherattheendofFY09andFY08,noratanypointinthoseyears,didtheBankenterintoagencycontracts,asconsideredinarticle22ofRoyalDecree1245/1995,14July.

Equityinvestmentsinnancialinstitutionscapital

AttheendofFY09andFY08,theBankdidnothaveequityinvestmentsinnancialinstitutionscapitalexceeding5%ofthecapitalorofthevotingpoweroftheseinstitu-tions.

1.5. Environmental impact

InviewofthefactthatthebusinessactivitythattheBankgenerallycarriesoutdoesnothaveasignicantimpactontheenvironment,thereisnobreakdownofinforma-tionrelatingtothisissue.

1.6. Compliance with legislation

1.6.1.Equity

BankofSpainCircular3/2008,22May,ondeterminingandcontrollingminimumequity,regulatestheminimumequitythatSpanishnancialinstitutionsmustmain-tainbothindividuallyandasaconsolidatedgroupandhowthisequitymustbedetermined,aswellasthevariousequityself-assessmentprocessesthattheinstitu-tionsmustperformandpublicinformationthattheymustgivetothemarket.

ThisCircularisthelatestdevelopment,fornancialinstitutions,oflegislationoneq-uityandsupervisiononaconsolidatedbasisofnancialinstitutions,passedunder


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Law36/2007,16November,whichamendsLaw13/1985,25May,oninvestmentcoefcient,equityandreportingobligationsfornancialbrokersandothernancialsystemstandards,andalsoincludesRoyalDecree216/2008,15February,onequityfor nancial institutions. This regulation also completes the process of adapting

SpanishlegislationtoEuropeanParliamentandCouncilDirective2006/48/EC,14June2006andEuropeanParliamentandCouncilDirective2006/49/EC,14June2006.InaccordancewiththeBaselCommitteeonBankingSupervisionAgreement(BaselII),bothdirectivesthoroughlyrevisedtheminimumequityrequirementsfornancialinstitutionsandtheirconsolidatedgroups.

BankofSpainCircular3/2008,22May,laysdownwhichitemsshouldbecalculatedasequity,inordertocomplywiththeminimumrequirementsestablishedinsaidregulation.EquityinaccordancewiththisregulationisclassiedasbasicequityandtierIIequity,anditisdifferenttoequitycalculatedinaccordancewiththeIFRS-EUbecausecertainheadingsareconsideredassuchandtheyincludetheobligationofdeducting othersthat are not included in the aforementioned IFRS-EU.The tech-niquesofconsolidationandvaluationforcontrolledcompaniestobeappliedinordertocalculatetheBanksminimumequityrequirementsaredifferentfromthoseapplied

todrawuptheconsolidatednancialstatement,whichalsocausesdifferencesforthepurposesofcalculatingequityundereachoftheregulations.

TheBankhasestablishedthefollowingmanagementguidelinestobeappliedtoitsequity:

Ensurecompliancewithapplicableregulationsregardingminimumequityrequire-ments.

Increaseefciencyinequitymanagement.EquityisconsideredacriticalaspectoftheBanksinvestmentdecision-making.

TheGroupscapitalisthereforemanagedontwolevels:regulatoryandeconomic.

Regulatorycapitalmanagementisbasedonananalysisofthecapitalbaseandthe

solvencyratios(corecapital,TIER1,etc.)undertheBaselcriterion(BIS)andtheBankofSpainscriterion.Theaimisforthecapitalstructuretobeasefcientaspos-sibleintermsofcostandcompliancewithregulator,ratingagencyandinvestorre-quirements. Active capital management includes securitisations, sale of assets,capitalissuesandhybridinstruments(preferenceandsubordinate).

CapitalmanagementfromaneconomicpointofviewaimstocreatemorevaluefortheBankanditsbusinessunits.Therefore,everyquartertheeconomiccapital,RO-RACandvaluecreationresultsforeachbusinessunitareanalysedandreportedtotheManagementCommittee.

TobeabletomanagetheBankscapitalproperly,futureneedsmustbeestimatedandanalysed,inanticipationofdifferentcyclestages.Regulatoryandeconomiccap-italforecastsarebasedonbudgetinformation(balancesheet,statementofincome,

etc)andmacroeconomicscenariosthattheResearchDepartmentdenes.Inaccord-ancewiththeseestimates,managementmeasuresareplanned(issues,securitisa-tions,etc.)requitedtomeetcapitaltargets.


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Differentstressscenariosarealsosimulatedtoassesscapitalavailabilityinadversesituations.Thesescenariosareestablishedbasedonsuddenchangesinmacroeco-nomicvariables,GDP,interestrates,stockmarkettrends,etc.that reectpasteco-nomicrecessionsthatcouldhappenagaininthefuture.

TheminimumequityrequirementsthattheaforementionedCircularlaysdownarecalculatedinaccordancewiththeGroupsexposuretocreditanddilutionrisk(inac-cordancewiththeassets,commitmentsandothermemoaccountsthattheseriskspresent, dependingon theiramounts,type, counterparts, guarantees, etc.), tothecounterpart and position and settlement risk relatingto the trading portfolio, ex-changerateriskandoperationalrisk.TheGroupmustalsocomplywiththeriskcon-centrationlimitsestablishedintheaforementionedCircularanditmustfullinternalCorporateGovernance,capitalself-assessmentandinterestrateriskcalculationob-ligations,aswellaspublicreportingobligationswithregardtothemarket,whicharealsoestablishedintheaforementionedCircular.Toguaranteecompliancewiththeseobjectives,theGroupperformscomprehensivemanagementoftheserisks,inaccord-ancewiththeaforementionedpolicies.

Thefollowingisabreakdown,classiedasbasicequityandtierIIequity,oftheBanksequityas at31December2009and2008,calculatedin accordancewithBankofSpainCircular3/2008,22May:

Thousands of euros

2009 2008

Basic equity (Tier 1) 265,633 238,142

Eligible equity 168,707 168,647

Reserves 84,708 75,241

Valuation adjustments eligible as basic equity (23,443) (41,089)

Other basic equity 52,000 52,000

Other basic equity deductions (16,339) (16,657)

Tier II equity 169,585 155,955

Main Tier II equity 57,735 86,905

Additional Tier II equity 111,850 69,050

Total eligible equity 435,218 394,097

Main ratios

Tier I 8.21% 7.12%

Tier II 5.25% 4.67%

Solvency ratio 13.46% 11.79%

Asat31December2009and2008,andduringthoseyears,theBankseligibleequitymettherequirementsinaccordancewithcurrentlegislationatthattime.


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1.6.2.MinimumReservesRatio

MonetaryCircular1/1998,29September,effectiveasof1January1999,revokedtheten-dayBankratio,replacingitwiththeminimumequityratio,whichisregulatedbyCentralEuropeanBankRegulation1745/2003.

Asat31December2009and2008,theBankmettheminimumrequirementsestab-lishedbyapplicableSpanishlegislation.

1.7. Deposit Guarantee Fund

TheBankispartoftheDepositGuaranteeFund.

TheexpenseincurredinthecontributionsmadetothisorganisationbytheBankamounted to approximately 992 thousand in FY08 (1,346 thousand in FY08),whichispostedinOtheroperatingchargesintheattachedstatementofincome(seeNote35).

1.8. Merger of Gest 21, S.L., Sociedad Unipersonal and Galeban Energa, S.A.,Sociedad Unipersonal

On10March2009,theBanksDirectorssignedthemergerconsistingofthedissolu-tionandtakeoverofthecompaniesGest21,S.L.,SociedadUnipersonalandGalebanEnerga,S.A.,SociedadUnipersonal,withtheenmassetransferofalloftheirassetstothecompanyBancoGallego,S.A.On19May2009,theshareholdersapprovedthemergerandthemergerbalancedated31December2008.

Theaccountingeffectsofthemergerwereestablishedon1January2009.Theafore-mentioned agreement wasentered intothe Companies Registers of Santiago deCompostelaandMadridon5November2009.

Themergerbalancesweretakenfromthebalancesheetsofthemergedcompaniesasat31December2008,whichwereapprovedattherespectiveGeneralSharehold-ersMeetingsanddidnotincludeanyadjustmentsorchanges.Themergedcompa-

niescontributedreservestotalling3,337thousand,whicharerecordedunderNetequity-Shareholdersfunds-Reservesontheattachedbalancesheet.

ThiscorporatetransactiontookplaceundertheSpecialregimeformergers,spin-offs,assetcontributionsandexchangeofsecuritiesinHeadingVIII,HeadingVII,ofRoyalLegislativeDecree4/2004,5March,whichapprovestheRevisedTextoftheSpanishCompaniesLaw.Inaccordancewiththeprovisions,theMinistryofFinancewasofciallynotiedbeforetheaforementionedmergerdeedwasenteredintheCompaniesRegister.

Therepresentativesofthecompaniesworkerswhowereinvolvedinthemergerwereinformed,induetimeandform,ofthepointsestablishedinarticle44ofRoyalLegis-lativeDecree1/1995,24March,whichapprovestheRevisedTextoftheWorkersStatuteLaw.

Note45containsthemergedcompanieslastclosedbalanceandthelistofassetstransferredtotheBanksubjecttoamortisation,showingtheyearinwhichthemergedcompaniesboughtthem,thevaluesatwhichtheseassetswereincludedintheBankandthecostandaccruedamortisationatwhichtheywererecordedinthemergedcompanies.Duetothedifferencesbetweenthevalueoftheassetsandliabilitiesinrelationtothebookcostatwhichtheywererecordedinthemergedcompanies,amergerreserveof3,337thousandbecameapparent,whichisrecorded.


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2. Accounting principles and policies and valuation criteria applied

Thefollowingaccountingprinciplesandpoliciesandvaluationcriteriawereappliedtodrawupthisnancialstatement:

2.1. Equity investments

2.1.1.Groupcompanies

GroupcompaniesareconsideredtobethosecompaniesinwhichtheBankisabletoexercisecontrol.Thispowerthatisgenerallyproven,althoughnotuniquely,throughthedirectorindirectownershipofatleast50%ofthevotingrightsofthecontrolledcompanyorlessthanthatorzero%if,forexample,thereareothercircumstancesoragreementsthatdeterminetheexistenceofadecision-makingunit.

Note12seprovidessomeinformationaboutthemostsignicantshareholdingsinthistypeofcompany.

Shareholdingsingroupcompaniesarepostedattheiracquisitioncost,netofimpair-mentlossesthattheseshareholdingsmighthavesuffered.

When,inaccordancewithBankofSpainCircular4/2004,22December,thereisevi-denceoftheimpairmentoftheseshareholdings,theiramountisestimatedasthenegativedifferencebetweentheirrecoverablevalue(shareholdingfairvalueminusthenecessarycostsfortheirsale,ortheirvalueinuse,whichisdenedasthecur-rentvalueofcashowsthatareexpectedtobereceivedfromtheshareholdingintheformofdividendsandthoserelatingtotheirtransferordisposalbyothermeans,whicheveristhegreaterofthetwo)andtheirbookvalue.Impairmentlosses,andrecoveriesofthelossespreviouslyposted,arechargedorcreditedtotheImpair-mentlossesonotherassets(net)headingofthestatementofincome.

AccrueddividendsintheyearfortheseshareholdingsarepostedintheReturnonequityinvestmentsheadingofthestatementofincome.

2.1.2.AssociatesTheyare companiesoverwhichthe Bankcanexercisesignicantcontrol,althoughtheyarenotadecision-makingunitwiththeBankoraretheyunderjointcontrol.Thispowerisusuallydemonstratedbydirectorindirectsharesthatareequaltoorgreaterthan20%ofthecontrolledcompanysvotingpower.

Sharesinassociatecompaniesarepostedattheiracquisitioncost,netofimpair-mentsthatthesesharesmighthavesufferedandestimatingtheimpairmentinthesametermsasthegroupcompaniesshares.

AccrueddividendsintheyearfortheseshareholdingsarepostedintheReturnonequityinvestmentsheadingofthestatementofincome.

Note12providessomeinformationaboutthemostsignicantshareholdingsinthis

typeofcompany.


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2.2. Financial instruments

2.2.1.Initialrecordingofnancialinstruments

FinancialinstrumentsarerecordedinthebalancesheetwhentheBankbecomes

partytothecontractfromwhichtheyoriginateinaccordancewiththetermsandcon-ditionsoftheaforementionedcontract.Inparticular,debtinstruments,suchasloansanddeposits,arerecordedfromthedateonwhichthelegalrighttoreceiveorthelegalobligationtopay,respectively,takeseffect.Financialderivativesofageneralnaturearerecordedonthedateonwhichtheyarecontracted.

Thesaleandpurchaseofnancialassetsimplementedviaconventionalcontracts,understoodtobethoseinwhichthemutualobligationsofbothpartiesshouldbecar-riedoutwithinatimeframesetoutbylegislationorbymarketconventionsandwhichcannotbesettledthroughdifferences,suchastradingcontractsorforwardforeignsalesor purchases,arerecordedfromthedateon whichtherewards,risks,rightsanddutiesattachedtoallownersaretheresponsibilityoftheacquirer,which,de-pendingonthetypeofnancialassetboughtorsold,canbethecontractingdateorthesettlementordeliverydate.Morespecically,operationscarriedoutonforeign

currencyspotmarketsarerecordedonthesettlementdate;operationscarriedoutwithcapitalinstrumentsnegotiatedonsecondarySpanishsecuritiesmarketsarerecordedonthe contractingdateand operationscarriedoutwithdebtinstrumentsnegotiatedonsecondarySpanishsecuritiesmarketsarerecordedonthesettlementdate.

2.2.2.Write-offofnancialinstruments

Anancialassetiswritten-offthebalancesheetwhenanyofthefollowingsituationsoccur:

Thecontractualrightstothecashowstheygeneratehaveexpired;or

Thenancialassetispassedonandthenancialassetsrisksandrewardsaresubstantiallytransferred,orwherethesubstantialtransferorretentionoftherisks

andrewardshasnotyethappened,controlofthenancialassetistransferred.

Similarly,anancialliabilityiswritten-offthebalancesheetwhentheobligationsitgenerateshaveexpiredorwhentheBankre-acquiresiteitherwiththeintentionofreinvestingitorcancellingit.


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2.2.3.Fairvalueandamortisedcostofnancialinstruments

Thefairvalueofanancialinstrumentonaspecicdateisunderstoodastheamountforwhichitcouldbeboughtorsoldonthisdatebetweentwoparties,dulyinformed,inamutuallyindependenttransaction.Themostobjectiveandusualreferenceofthe

fairvalueofanancialinstrumentisthepricethatwouldbepaidforitonanorgan-ised,transparentanddeepmarket(listingpriceormarketprice).

Whenthereisnomarketpriceforaparticularnancialinstrument,itsfairvalueisestimatedusingrecenttransactionsofsimilarinstrumentsandwhenthesearenotavailable,byvaluationmodelsthathavebeensufcientlycheckedbytheinterna-tionalnancecommunity;thespeciccharacteristicsofthenancialinstrumenttobevaluedaretakenintoconsiderationand,inparticular,thedifferenttypesofriskas-sociatedwiththeinstrument.

Inparticular,thefairvalueofnancialderivativestradedonorganised,transparentanddeepmarketsincludedintradingportfoliosisaddedtoitsdailylistingandif,forexceptionalreasons,alistingcannotbeestablishedonaspecicdate,similarmeth-odstothoseusedforvaluingderivativesnotnegotiatedonorganisedmarketsare

used.Thefairvalueofderivativesnottradedonorganisedmarketsortradedonorganisedmarketsthatarenotverytransparentordeepisaddedtothetotalfuturecashowsoriginatingfromtheinstrument,deductedonthevaluationdate(realvalueorthe-oreticalclose);usingmethodsacknowledgedbynancialmarketsinthevaluationprocess:NetPresentValue(NPV),modelsfordeterminingthepriceofoptions,etc.

Amortisedcostisunderstoodasthecostofacquiringanancialassetorliability(plusorminus,dependingonthecase)adjustedthroughprincipalrepaymentsandinterestandplusorminus,dependingonthecase,thepartincludedinthestatementofincome (by the effective interest method) ofthe difference between theinitialamountandtherepaymentvalueofthenancialinstrument.Inthecaseofnancialassets,theamortisedcostalsoincludescorrectionstoitsvaluecausedbyanyim-

pairmentthatitmayhaveexperienced.Effectiveinterestisthediscountratethatexactlyequatestheinitialvalueofanan-cialinstrumenttoitsestimatedcashowsforallitemsduringitsremaininglife.Forxedratenancialinstruments,the effectiveinterestratematchesthecontractualinterestrateestablishedwhentheacquisitiontakesplaceandrevised,whenneces-sary,bycommissionsandbytransactioncoststhat,inaccordancewithBankofSpainCircular4/2004,22December,shouldbeincludedinthecalculationofthiseffectiveinterestrate.Forvariableratenancialinstruments,effectiveinterestisestimatedinasimilarwaytoxedrateoperations;recalculatingtheoperationscontractualinter-estrateoneachoftherevisiondatesandconsideringanychangesthatfuturecashowsmayexperience.

ThefollowingisasummaryofthedifferentvaluationtechniquesthattheBankuses

forthevaluationofnancialinstrumentspostedatfairvalueasat31December2009and2008:


61/226

2009 ANNUAL

ANNUALACCOUNTS

Percentage

Assets Liabilities

Market value based on 2009 2008 2009 2008

Listings published in active markets 93.15% 92% 0.62% 1%Internal valuation models with observable market data 6.85% 8% 99.38% 98%

Internal valuation models with non-market data 1%

100% 100% 100% 100%

Themaintechniquesusedininternalvaluationmodelsare:

Inthevaluationofnancialinstrumentsthatallowstatichedging(mainlyforwardsandswaps)thepresentvalueisused.

Inthevaluationofnancial instrumentsthatrequiredynamichedging,theBlack-Scholesmodelismainlyused.

Creditriskisassessedusingsimilardynamicmodelstothoseusedtoassessthe

interestrisk.TheBanksDirectorsthinkthatthenancialassetsandliabilitiesrecordedinthebal-ancesheetandtheprot/lossgeneratedbythesenancialinstrumentsarereason-ableandreecttheirmarketvalue.

Thefollowingisabreakdownofthenancialinstrumentsinaccordancewiththevalu-ationmethodused:


2009 2008

Listingspublishedin activemarkets

Internalmodels

Total

Listingspublishedin activemarkets

Internalmodels

Total

Trading portfolio (asset) 197 2,717 2,914 78 1,747 1,825

Debt securities and other equity instruments 494,540 11,482 506,022 442,315 7,662 449,977

Hedge derivatives (asset) 22,869 22,869 30,503 30,503

Trading portfolio (liability) 125 1,763 1,888 239 2,444 2,683

Hedge derivatives (liability) 18,412 18,412 26,746 26,746

2.2.4.Classicationandvaluationofnancialassetsandliabilities

Thefollowingtiersareusedtopresentthenancialinstrumentsclassiedinthe

Annual Report 2009 Banco Gallego

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