Banco Santander (México), S.A., Institución de Banca ... · Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México and Subsidiaries

Banco Santander (México), S.A.,

Institución de Banca Múltiple, Grupo

Financiero Santander México and

Subsidiaries

Consolidated Financial Statements for

the Years Ended December 31, 2015

and 2014 and Independent Auditors’

Report Dated February 22, 2016

Banco Santander (México), S.A., Institución de Banca Múltiple,

Grupo Financiero Santander México and Subsidiaries

Independent Auditors’ Report and Consolidated

Financial Statements of 2015 and 2014

Table of contents Page

Independent Auditor’s Report 1

Consolidated Balance Sheets 3

Consolidated Statements of Income 5

Consolidated Statements of Changes in Stockholders’ Equity 6

Consolidated Statements of Cash Flows 7

Notes to Consolidated Financial Statements 9

Independent Auditors’ Report to the Board

of Directors and Stockholders of

Banco Santander (México), S.A., Institución

de Banca Múltiple, Grupo Financiero

Santander México and Subsidiaries

We have audited the accompanying consolidated financial statements of Banco Santander (México), S.A., Institución

de Banca Múltiple, Grupo Financiero Santander México and subsidiaries (the “Institution”), which comprise the

consolidated balance sheets as of December 31, 2015 and 2014 and the consolidated statements of income, changes

in stockholders’ equity and cash flows for the years then ended, and a summary of the significant accounting policies

and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

The Institution’s management is responsible for the preparation of these consolidated financial statements in

accordance with the accounting criteria established by the Mexican National Banking and Securities Commission

(the “Commission”) as set forth in the General Provisions Applicable to Credit Institutions and Regulated Multiple

Purpose Finance Entities and Market Participants in Relation to Derivatives Contracts Listed on the Mexican

Market” (the “Provisions”), and for such internal controls as management deems necessary for the preparation of

consolidated financial statements that are free of material misstatement, whether due to fraud or error.

Responsibility of the Independent Auditors

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We

conducted our audits in accordance with International Standards on Auditing. Those standards require that we

comply with the ethical requirements and plan and perform the audit to obtain reasonable assurance about whether

the consolidated financial statements are free from material misstatement and that they are prepared in accordance

with the accounting criteria established by the Commission as set forth in the Provisions.

An audit involves performing procedures to obtain evidence supporting the amounts and disclosures in the

consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the

assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or

error. In making those risk assessments, the auditor considers internal control relevant to the Institution’s preparation

of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances,

but not for the purpose of expressing an opinion on the effectiveness of the Institution’s internal control. An audit

also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting

estimates made by management, as well as evaluating the overall presentation of the consolidated financial

statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

2

Opinion

In our opinion, the consolidated financial statements of Banco Santander (México), S.A, Institución de Banca

Multiple, Grupo Financiero Santander México and subsidiaries for the years ended December 31, 2015 and 2014,

have been prepared, in all material respects, in accordance with the accounting criteria established by the

Commission.

Emphasis of Matter

The accompanying consolidated financial statements have been translated into English for the convenience of

readers.

Galaz, Yamazaki, Ruiz Urquiza, S.C.

Member of Deloitte Touche Tohmatsu Limited

C.P.C. Erika Regalado García

February 22, 2016

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Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México and Subsidiaries

Consolidated Balance Sheets As of December 31, 2015 and 2014

(In millions of Mexican pesos)

Assets 2015 2014

Funds available $ 99,838 $ 101,198 Margin accounts 1,943 2,855 Investment in securities:

Trading securities 208,913 114,216 Securities available for sale 113,803 83,270 Securities held to maturity 5,638 5,462

328,354 202,948 Receivables under sale and repurchase agreements 6,207 5,200 Securities loans 1 -

Derivatives: Trading purposes 116,668 92,544 Hedging purposes 12,121 4,740

128,789 97,284 Valuation adjustment for hedged financial assets 104 (44) Performing loan portfolio:

Commercial loans- Commercial or business activity loans 257,268 212,933 Loans to financial entities 9,841 5,580 Loans to government entities 59,870 55,925

326,979 274,438

Consumer loans 88,029 72,459 Mortgage loans 114,489 101,189

Total performing loan portfolio 529,497 448,086 Non-performing portfolio:

Commercial loans- Commercial or business activity loans 8,593 8,889 Loans to government entities 3 2 8,596 8,891

Consumer loans 3,664 3,165 Mortgage loans 5,988 5,399

Total non-performing loan portfolio 18,248 17,455

Total loan portfolio 547,745 465,541 Allowance for loan losses (19,743) (16,951)

Loan portfolio (net) 528,002 448,590 Accrued income receivable from securitization transactions 73 127 Other receivables (net) 61,032 51,213 Foreclosed assets (net) 557 358 Property, furniture and fixtures (net) 5,547 5,259 Long-term investment in shares 182 152 Deferred income taxes and employee statutory profit sharing (net) 18,137 16,885 Other assets (net)

Deferred charges, advance payments and intangibles 5,328 4,578 Other 43 39

5,371 4,617

Total assets $ 1,184,137 $ 936,642

Liabilities 2015 2014

Deposits: Demand deposits $ 347,800 $ 294,103 Time deposits -

General public 121,761 133,967 Money market 47,145 31,832

168,906 165,799 Credit instruments issued 40,123 27,028

556,829 486,930 Bank and other loans:

Demand loans 9,267 3,065 Short-term loans 26,968 27,470 Long-term loans 26,220 24,410

62,455 54,945 Payables under sale and repurchase agreements 195,103 105,223 Collateral sold or pledged as security:

Securities loans 23,604 14,077 Derivatives 1,019 - 24,623 14,077

Derivatives: Trading purposes 124,801 94,779 Hedging purposes 9,556 4,389

134,357 99,168 Other payables:

Income taxes payable 760 10 Employee profit sharing payable 233 213 Payables arising from settlement of transactions 41,567 24,465 Liabilities for collaterals received in cash 14,275 6,033 Sundry creditors and other payables 19,154 22,033

75,989 52,754 Subordinated liabilities 22,788 19,446 Deferred credits and other advances 351 498

Total liabilities 1,072,495 833,041

Stockholders’ equity Paid-in capital:

Capital stock 11,348 11,348 Share premium 23,450 23,450

34,798 34,798 Other capital:

Capital reserves 9,515 9,515 Retained earnings 52,783 45,465 Result from valuation of available for sale securities, net (521) (551) Result from valuation of cash flow hedge instruments, net 813 266 Cumulative translation effect 9 9 Net income 14,186 14,053

76,785 68,757 Non-controlling interest 59 46

Total stockholders’ equity 111,642 103,601

Total liabilities and stockholders’ equity $ 1,184,137 $ 936,642

4

Memorandum accounts (see Note 33) 2015 2014

Own record accounts:

Contingent assets and liabilities $ 20 $ 12

Credit commitments 138,560 132,353

Assets in trust or mandate:

Trusts 141,287 135,497

Mandates 243 247

Assets in custody or under administration 3,346,631 3,193,157

Collaterals received 60,456 52,309

Collaterals received and sold or pledged as security 23,239 27,409

Investment bank operations on account of third parties 341,190 462,753

Uncollected interest earned on past due loan portfolio 1,876 1,427

Other accounts 936,795 656,653

$ 4,990,297 $ 4,661,817

“The present consolidated balance sheets, were prepared in conformity with the Accounting Criteria for Credit

Institutions, issued by the National Banking and Securities Commission, in accordance with the requirements set forth in

articles 99, 101, and 102 of the Credit Institutions Law, which are of a general and mandatory nature and have been

applied on a consistent basis. Accordingly, the balance sheets reflect the the operations financial position of the the

Institution as of the aforementioned dates. The operations reported herein were carred out and valued in accordance with

sound banking practices and the applicable legal and administrative standards.”

“The accumulated capital stock as of December 31, 2015 amounts to $8,086.”

The accompanying notes are part of these consolidated financial statements. “The accompanying financial statements have been published on the website: http://www.santander.com.mx and

http://www.cnbv.gob.mx”.

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Consolidated Statements of Income For the years ended December 31, 2015 and 2014


2015 2014

Interest income $ 63,798 $ 57,895 Interest expense (21,213) (20,368)

Financial margin 42,585 37,527 Provisions for loan losses (17,244) (14,289)

Financial margin after provisions for loan losses 25,341 23,238 Commission and fee income 17,627 16,109 Commission and fee expense (3,305) (3,207)

Net gain on financial assets and liabilities 2,280 2,953 Other operating income 1,377 1,451

Administrative and promotional expenses (25,093) (23,224)

Total operating income 18,227 17,320 Equity in results of unconsolidated subsidiaries and associates 81 79

Income before income taxes 18,308 17,399 Current income taxes (4,984) (2,121) Deferred income taxes (net) 875 (1,224) (4,109) (3,345)

Net income 14,199 14,054 Non-controlling interest (13) (1)

Net income attributable to controlling interest $ 14,186 $ 14,053 “The present Consolidated Statements of Income were prepared in conformity with the Accounting Criteria for

Credit Institutions, issued by the National Banking and Securities Commission, in accordance with the requirements

set forth in articles 99, 101, and 102 of the Credit Institutions Law, which are of a general and mandatory nature and

have been applied on a consistent basis. Accordingly, the statements of income reflect the financial performance of

the Institution during the aforementioned periods. The operations reported herein were performed and valued in

accordance with sound banking practices and the applicable legal and administrative standards.”

The accompanying notes are part of these consolidated financial statements.

“The accompanying financial statements have been published on the website: http://www.santander.com.mx and

http://www.cnbv.gob.mx”.

6



Consolidated Statements of Changes in Stockholders’ Equity For the years ended December 31, 2015 and 2014

(In millions of Mexican pesos) Paid-in Capital Other Capital

Result from Result from

valuation of valuation of Cumulative

Social capital securities cash flow translation Non- Total

Share Capital Retained available hedge effect Net controlling stockholders’

Historical Restated Total premium reserves earnings for sale, net instruments income interest equity

Balances as of December 31, 2013 $ 8,086 $ 3,262 $ 11,348 $ 23,450 $ 9,515 $ 30,004 $ (409) $ 24 $ 9 $ 18,936 $ 63 $ 92,940

Entries arising from decisions approved by stockholders

Transfer of prior year net income - - - - - 18,936 - - - (18,936) - -

Dividends declared - - - - - (3,473) - - - - - (3,473)

Total entries arising from decisions approved by

Stockholders - - - - - 15,463 - - - (18,936) - (3,473)

Entries inherent to comprehensive income-

Result from valuation of available for sale securities, net - - - - - - (142) - - - - (142)

Result from valuation of cash flow hedge instruments, net - - - - - - - 242 - - - 242

Allowance for loan losses applied against retained earnings for

change in the commercial loan methodology - - - - - (58) - - - - - (58)

Recoveries of credit reserves and of securities previously

applied to retained earnings - - - - - 20 - - - - - 20

Share of comprehensive income of associates accounted for by

the equity method - - - - - 36 - - - - (18) 18

Net income - - - - - - - - - 14,053 1 14,054

Total comprehensive result - - - - - (2) (142) 242 - 14,053 (17) 14,134

Balances as of December 31, 2014 8,086 3,262 11,348 23,450 9,515 45,465 (551) 266 9 14,053 46 103,601

Entries arising from decisions approved by stockholders-

Transfer of prior year net income - - - - - 14,053 - - - (14,053) - -

Dividends declared - - - - - (6,760) - - - - - (6,760)

Total entries arising from decisions approved by

stockholders - - - - - 7,293 - - - (14,053) - (6,760)

Entries inherent to comprehensive income-

Result from valuation of available for sale securities, net - - - - - - 30 - - - - 30

Result from valuation of cash flow hedge instruments, net - - - - - - - 547 - - - 547

Recoveries of credit reserves and of securities previously

applied to retained earnings - - - - - 14 - - - - - 14

Share of comprehensive income of associates accounted for by

the equity method - - - - - 11 - - - - 11

Net income - - - - - - - - - 14,186 13 14,199

Total comprehensive result - - - - - 25 30 547 - 14,186 13 14,801

Balances as of December 31, 2015 $ 8,086 $ 3,262 $ 11,348 $ 23,450 $ 9,515 $ 52,783 $ (521) $ 813 $ 9 $ 14,186 $ 59 $ 111,642

“The present Consolidated Statements of Changes in Stockholders’ Equity were prepared in conformity with the Accounting Criteria for Credit Institutions, issued by the National Banking and Securities Commission, in accordance with the requirements

set forth in articles 99, 101, and 102 of the Credit Institutions Law, which are of a general and mandatory nature and have been applied on a consistent basis. Accordingly, the statements of changes in stockholders’ equity reflect all of entries that give

rise to changes in stockholders’ equity of the Institution during the aforementioned periods. The operations reported herein were performed and valued in accordance with sound banking practices and the applicable legal and administrative standards.”


“The accompanying financial statements have been published on the website: http://www.santander.com.mx and http://www.cnbv.gob.mx”.

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Consolidated Statements of Cash Flows For the years ended December 31, 2015 and 2014


2015 2014

Net income $ 14,186 $ 14,053

Adjustment for line items that do not require cash flows -

Result from valuation associated with investing or financing activities (5,733) (2,874)

Equity in the results of associates (81) (79)

Depreciation of property, furniture and fixtures 900 784

Amortizations of intangible assets 963 897

Current and deferred income taxes 4,109 3,345

Deferred employee profit sharing (202) 38

Share-based payments 68 250

Provisions 174 389 14,384 16,803

Operating activities:

Margin accounts 912 410

Investment in securities (126,825) (30,540)

Receivables under sale and repurchase agreements (1,007) 30,331

Derivatives-asset (26,030) (19,187)

Loan portfolio-net (77,971) (69,045)

Accrued income receivable from securitization transactions 54 (3)

Foreclosed assets (199) 67

Other operating assets (12,764) (7,370)

Deposits 68,485 53,959

Bank and other loans 7,510 9,565

Payables under sale and repurchase agreements 89,880 26,596

Collateral sold or pledged as security 10,547 1,738

Derivatives-liability 35,151 22,517

Other operating liabilities 21,620 (17,728)

Payments of income taxes (1,187) (3,594)

Net cash provided by operating activities 2,560 14,519

Investing activities:

Proceeds from disposal of property, furniture and fixtures 5 5

Payments for acquisition of property, furniture and fixtures (1,190) (1,279)

Cash dividends received 51 70

Payments for acquisition of intangible assets (1,761) (1,226)

Net cash used in investing activities (2,895) (2,430)

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2015 2014

Financing activities:

Cash payment of dividends (6,760) (3,473)

Recovery of reserves previously applied to retained earnings 14 20

Net cash used in financing activities (6,746) (3,453)

Net (decrease) increase in funds available (7,081) 8,636

Adjustment to funds available for changes in exchange rate 5,721 2,908

Funds available at the beginning of the year 101,198 89,654

Funds available at the end of the year $ 99,838 $ 101,198

“The present Consolidated Statements of Cash Flows were prepared in conformity with the Accounting Criteria for

Credit Institutions, issued by the National Banking and Securities Commission, in accordance with the requirements

set forth in Articles 99, 101, and 102 of the Credit Institutions Law, which are of a general and mandatory nature and

have been applied on a consistent basis. Accordingly, the statements of cash flows reflect the cash inflows and

outflows of the Institution during the aforementioned periods. The operations reported herein were performed and

valued in accordance with sound banking practices and the applicable legal and administrative standards.”


“The accompanying financial statements have been published on the website: http://www.santander.com.mx and http://www.cnbv.gob.mx”.

9



Notes to Consolidated Financial Statements

For the years ended December 31, 2015 and 2014


1. Explanation for translation into English

The accompanying consolidated financial statements have been translated from Spanish into English for use

outside of México. These consolidated financial statements are presented on the basis of accounting criteria

prescribed by the Commission. Certain accounting practices applied by the Institution may not conform to

accounting principles generally accepted in the country of use.

2. Activity and economic and regulatory environment

Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México (the “Institution”) is a subsidiary of Grupo Financiero Santander México, S.A.B. de C.V. (the “Financial Group”), which holds 99.99% of its common stock and is regulated by, among others, the Credit Institutions Law and the General Provisions issued by the Mexican National Banking and Securities Commission (the “Commission”) and Banco de México (“Central Bank”). The Institution’s corporate purpose is to render banking and credit services under the terms of applicable laws, which services include, among others, reception of deposits, acceptance of loans, granting of loans, trading of securities and the execution of trust contracts. During 2015, the principal macroeconomic indicators underwent certain changes, among them, accumulated inflation in 2015 was 2.13%, compared to 4.8% in 2014, and Gross National Product (GNP), which was expected to increase by between 1.9% and 2.4%, increased by 1.1% in 2015. Also, given the world situation regarding international oil prices, towards the end of 2015, the peso suffered a significant depreciation of 17% against the US dollar, going from $14.74 Mexican pesos per US dollar at the close of 2014 to $17.24 Mexican pesos per US dollar as of December 31, 2015. Significant events 2015- a. Acquisition of Scotiabank portfolio - On November 26, 2014, the Institution reached an agreement to

acquire from Scotiabank Inverlat, S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, a portfolio of non-revolving consumer loans. On March 17, 2015, after having obtained authorization from the relevant regulatory authorities, the Institution entered into a contract with Scotiabank for the acquisition of non-revolving consumer loan portfolio, which had previously been announced. Such acquisition was completed during April 2015. The acquired portfolio is comprised of 39,252 loans, with a total balance of $3,179.

The price paid for the acquired loans was $3,002, generating a difference with respect to the nominal value of $177, which was recognized to results within the item “Other operating income”.

b. During a meeting of the Board of Directors on July 23, 2015, agreement was reached to appoint

PricewaterhouseCoopers, S.C., as the external auditor of the Group to conduct the audit of the consolidated financial statements for 2016, 2017 and 2018. This decision was taken in line with corporate governance guidelines recommending periodic rotation of the external auditor, on the proposal of the Audit Committee.

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Significant events 2014-

a. Commitment to sell custody business - During 2014, the Parent Company and the Institution reached

an agreement for the sale of the custody business to FINESP Holdings II B.V., an affiliate of Warburg

Pincus (“Warburg Pincus”) and Temasek Holdings Private Limited (“Temasek”):

On June 19, 2014, the Parent Company announced that it had reached a definitive agreement

with an affiliate of Warburg Pincus and Temasek to acquire 50% of the custody business of

Santander in Spain, México and Brazil through a new company. The close of the transaction

was expected for the fourth quarter of 2014.

Also, on June 19, 2014, the Parent Company made an offer to purchase the custody business,

which was accepted by Banco Santander (the Bank), S.A., Institución de Banca Múltiple,

Grupo Financiero Santander México. The selling price agreed was $2,030. Such offer forced

the Institution to transfer the business; however, this obligation was subject to the following

conditions: i) it was valid until June 19, 2015; ii) it was subject to the same conditions

established in the global agreement signed by the Parent Company; iii) the appropriate

authorizations to create a company whose corporate purpose will be the operation of the

custody business must be obtained from the Mexican authorities; iv) it depends on the global

operation, inasmuch as if the latter is terminated, the operation in México will also be

terminated; and v) the transaction must be made legal through the signing of the respective

contracts.

The strategic alliance was approved by the Board of Directors of both the Parent Company and

the Institution during its meeting held on July 22, 2014.

On July 24, 2015, the Institution received a notification from the Parent Company announcing

that the aforementioned transaction was automatically terminated since the global operation

established in the global agreement signed by the Parent Company on June 2014 was not

concluded within the twelve-month acceptation period. Therefore the closing of the purchase

was not concluded. However, the Parent Company made another offer with a price of $1,191 to

the Institution to purchase the custodial business, which was accepted by the Institution. Such

offer obliges the Bank to transfer the business; however, this obligation was subject to the

following conditions: i) it was valid until June 19, 2015; ii) it was subject to the same

conditions established in the global agreement signed by the Parent Company; iii) the

appropriate authorizations to create a company whose corporate purpose will be the operation

of the custody business must be obtained from the Mexican authorities; iv) it depends on the

global operation, inasmuch as if the latter is terminated, the operation in Mexico will also be

terminated; and v) the transaction must be made legal through the signing of the respective

contracts

Pursuant to the foregoing, although the Institution has an obligation to transfer the custody

business to a special purpose vehicle because it accepted the offer made by the Parent

Company, such obligation is subject to different conditions which, to date, have not been

fulfilled, such as the relevant authorization from the Mexican financial authorities for the

vehicle that will render the custody services, among others. Furthermore, to date, no final

determination has been made regarding the vehicle that will be used to render the custody

service and in which the association will be performed. Consequently, no financial or tax effect

has been recognized in the consolidated financial statements of the Institution.

b. Sale of foreclosed assets - During December 2013, the Institution signed an agreement with a financial

institution for the sale of 1,309 foreclosed assets. The transaction concluded on January 31, 2014 at a

selling price of $282, generating a pretax gain of $149, which was recorded in the consolidated

statement of income under the heading “Other operating income”.

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3. Significant accounting policies

The significant accounting policies applied by the Institution are in conformity with the accounting criteria

established by the Commission in the “General Provisions Applicable to Credit Institutions and Financial

Companies Regulated Multiple Purpose and Market Participants in Relation to Derivatives Contracts Traded

on the Mexican Market” (the “Provisions”), in its circulars and in general and specific official mandates,

which require that management make certain estimates and utilize certain assumptions to determine the

valuation of items included in the consolidated financial statements and to make required disclosures.

Although the actual results may differ, management believes that the estimates and assumptions utilized were

appropriate under the circumstances.

Based on the Provisions, the accounting of the Institution shall be in conformity with Mexican Financial

Reporting Standards (“MFRS”, which are comprised of individual accounting standards that are known as

“NIF”) as promulgated by the Mexican Board of Financial Reporting Standards (“CINIF”), except when the

Commission believes that a specific regulation or accounting treatment should be applied on the basis that the

institutions subject to its rules carry out specialized operations.

The regulations of the Commission referred to in the preceding paragraph, are at the level of standards for

recognition valuation, presentation and, if applicable, disclosure, applicable to specific headings of the

consolidated financial statements, as well as those applicable to their preparation.

In this regard, the Commission clarifies that the application of accounting criteria, or the concept of

supplemental application, will not apply in the case of transactions which, by express provision of law, are not

permitted or are prohibited or, by the same token, are not expressly authorized.

Changes in accounting policies -

Changes in the Commission’s Accounting Criteria-

On July 23, 2015, the Federal Official Gazette published an amendment to the provisions established in

accounting criteria for market participants in relation to derivatives contracts listed on the Mexican market.

This amendment establishes that the derivatives markets and traders which take part in the market of

derivatives contracts listed on the market itself, should maintain their accounting in accordance with the

applicable MFRS criteria. For such purpose, clearinghouses and settlement partners which take part in the

derivatives contracts market should observe the “Accounting Criteria for Clearinghouses,” and “Accounting

Criteria for Settlement Partners”, respectively. These amendments went into effect on the day after their

publication. Changes in MFRS applicable to the Institution - Improvements to MFRS - The objective of these improvements is to incorporate into MFRS, changes and clarifications in order to

establish a more appropriate regulatory approach. Improvements to MFRS are classified between those

improvements that result in accounting changes in valuation, presentation or disclosure in the consolidated

financial statements, and those improvements that are modifications to MFRS in order to clarify to them,

thereby helping to establish a clearer and more transparent regulatory approach; such clarifications do not

result in accounting changes in the consolidated financial statements. From January 1, 2015, the Institution adopted the following improvements to MFRS that do not result in

accounting changes: NIF B-8, Consolidated or Combined Financial Statements- Clarifies the criteria to be evaluated in order to

identify an investment entity and indicates that given the nature of the primary activity of an investment

entity, it may be difficult for such an entity to exercise control over the entities in which it has invested;

therefore, an analysis should be carried out in order to conclude whether the entity exercises control over its

investees. If there is no control, it must identify the type of investment concerned and, apply the appropriate

MFRS for accounting recognition.

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Bulletin C-9, Liabilities, Provisions, Contingent Assets and Liabilities and Commitments- Clarifies and

modifies the accounting treatment for liabilities arising from customer advances denominated in foreign

currency. When an entity receives advance collections for sales or services denominated in foreign currency,

the changes in exchange rates between the functional currency and the transaction currency do not affect the

amount of the advance collection. Accordingly, the balance of the customer advances liability should not be

modified as a result of such changes in exchange rates.

From January 1, 2015, the Institution adopted the following improvements to MFRS that do not result in

accounting changes:

NIF B-13, Events Subsequent to the Date of the Financial Statements and Bulletin C-9, Liabilities,

Provisions, Contingent Assets and Liabilities and Commitments -NIF B-13 includes in a footnote the

disclosures in the financial statements of an entity that are not prepared on a going concern basis in

accordance with NIF A-7, Presentation and Disclosure. Such requirement was included as part of the

regulatory text in the disclosure standards section of NIF B-13, and as part of Bulletin C-9 to disclose the

contingencies arising from the fact that the entity is not operating on a going concern basis. Consequently,

Circular 57 Sufficient Disclosure is repealed as a result of the Commercial Bankruptcy Law.

NIF B-15, Conversion of Foreign Currencies - The definition of foreign operations was modified to clarify

that it not only refers to a legal entity or a cash generating unit whose operations are based on or carried out in

an economic environment or currency different from those of the reporting entity, but also includes legal

entities or cash generating units that operate in the same country as the reporting entity (parent or holding

company), but use a currency different from that of the reporting entity.

The adoption of these improvements had no material effects on the Institution’s financial information.

Changes in accounting estimates applicable in 2015

Methodology for the determination of the allowance for loan losses applicable to the consumer credit

portfolio

On August 27, 2015, the Commission issued a Resolution which modifies the Provisions for Credit

Institutions and results in various changes to the methodology for classifying consumer loan portfolio in order

to adopt an expected loss model for such portfolio, as well as for certain guarantees.

For such consumer loans, the Commission believes it advisable to recognize the guarantee schemes known as

pari passu, or first losses, for such portfolio classification in order to eliminate regulatory inconsistencies.

This change in estimate did not have a material effects on the Institution’s consolidated financial statements

as of December 31, 2015.

Methodology for the determination of the allowance for loan losses applicable to credits granted under the

Commercial Bankruptcies Law

On August 27, 2015, the Commission issued a Resolution which modifies the Provisions for Credit

Institutions, indicating the term during which credit institutions may continue to use the methodology for the

allowance for expected losses due to credit risks in relation to loans granted to borrowers declared

commercially bankrupt with a prior restructuring plan. This Resolution establishes that once an agreement is

adopted between the borrower and the recognized creditors, or the bankruptcy of the borrower is determined

in accordance with the Commercial Bankruptcies Law, such methodology can no longer be applied.

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It is also established that authorization may be requested from the Commission to continue using the

methodology for the calculation of the allowances for expected losses due to credit risk with regard to loans

granted to borrowers declared commercially bankrupt with a prior restructuring plan, for a term which cannot

exceed six months computed as of the adoption of the agreement. The change in estimate did not have any material effects on the consolidated financial statements of the

Institution as of December 31, 2015.

Changes in accounting policy applicable in 2014 Methodology for the determination of the allowance for loan losses applicable to loans granted under the Commercial Bankruptcy Law On March 26, 2014, the Commission issued a ruling which amends the Provisions, adjusting the methodology applicable to the classification of commercial loan portfolio for loans granted under Sections II and III of Article 224 of the Commercial Bankruptcy Law in order to make it consistent with the modifications made to such statute on January 10, 2014. This methodology mainly involves the consideration of collaterals under Article 75 of the Commercial Bankruptcy Law for the determination of the Severity of Loss applying certain adjustment factors or discount rates for each type of eligible collateral. The change in allowance methodology did not have any material effects on the Institution’s consolidated financial statements as of December 31, 2014. Special accounting criteria applicable in 2014 Special accounting criteria applicable to loans subject to the support derived from the flooding caused by Hurricane “Odile” In Official Notice P110/2014 dated September 19, 2014, the Commission authorized the application of special accounting criteria for the purpose of assisting the borrowers of the Institution that were affected as a result of the flooding and damage caused by Hurricane “Odile”, including the severe rainfall and other adverse natural phenomena which affected different towns and cities in the State of Baja California Sur. Such financial aid was applicable to customers who were domiciled in or had loans with the source of payment located in areas declared as disaster zones by the Department of the Interior in the Federal Official Gazette. The purpose of this aid was to assist in the economic recovery of the affected zone through the implementation of different measures, such as: 1. Loans with a single payment of principal at maturity and periodic payments of interest, as well as loans

with a single payment of principal and interest at maturity, which were renewed or restructured, were

not considered as non-performing portfolio under the terms established in Accounting Criterion B-6,

Credit Portfolio (“Accounting Criterion B-6”), issued by the Commission. A requirement was

established to the effect that the new deadline granted to the borrower should not exceed three months

as of the date of the original maturity. The above applies to loans included in performing portfolio as of the date of the incident, in accordance with Accounting Criterion B-6 issued by the Commission, and the respective renewal or restructuring procedures conclude within 120 calendar days after the date of the incident.

2. Loans with periodic principal and interest payments and which are subject to restructuring or renewal

may be considered as performing when this event takes place, thereby avoiding the following

requirements detailed in Accounting Criterion B-6.

i. Not having passed at least 80% of the original loan term:

a. The borrower has covered all accrued interest, and

b. Covered the principal of the original loan amount, which at the date of the renewal or

restructuring should have been covered.

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ii. Throughout the final 20% of the original loan term:

a. Paid al accrued interest;

b. Covered the entire original loan amount that the date of renewal or restructuring should

have been covered, and

c. Covered 60% of the original loan amount. This treatment is applicable as long as the loans in question are classified as performing portfolio at the

date of the casualty, in conformity with Accounting Criterion B-6, provided the respective renewal or

restructuring procedures are concluded no more than 120 calendar days after the casualty date and the

new maturity date granted to the borrower does not exceed three months as of the original maturity

date.

3. Loans which from the beginning were stipulated as revolving, which are restructured or renewed

within the 120 calendar days following the date of the adverse weather event, will not be considered as

non-performing portfolio under the terms of Accounting Criterion B-6 of the Commission. Such

benefit may not exceed three months as of the date of maturity. The above applies provided that they

refer to loans which are recorded as performing portfolio as of the date of the adverse weather event. 4. The loans indicated in the foregoing will not be considered as restructurings under the terms of

Accounting Criterion B-6 of the Commission. The Institution received different requests for aid from the borrowers affected by the flooding and damage

caused by Hurricane “Odile”. The financial aid consisted of deferring the payments by 60 days compared to

the original deadlines. As of December 31, 2014, the balance of the loan portfolio which received this

financial aid was $170. These loans were not considered as non-performing portfolio under the terms of

Accounting Criterion B-6 of the Commission. The loans which received the aforementioned financial aid are current with their payments of both principal

and interest. The significant accounting policies applied by the Institution are as follows:

Monetary unit of the consolidated financial statements - The consolidated financial statements and notes for the years ended December 31, 2015 and 2014 include balances and transactions in Mexican pesos of different purchasing power. Basis for consolidation - The accompanying consolidated financial statements include those of the Institution

and its subsidiaries listed below. All significant intercompany balance and transactions have been eliminated

on consolidation. The consolidated subsidiaries and the Institution’s equity percentage are as follows:

Equity Percentage

2015 2014

Santander Consumo, S.A. de C.V., SOFOM ER (“Santander Consumo”) 99.99% 99.99%

Santander Hipotecario, S.A. de C.V., SOFOM ER (“Santander Hipotecario”) 89.95% 87.87%

Santander Vivienda, S.A. de C.V. SOFOM ER (“Santander Vivienda”) 99.99% 99.99%

Centro de Capacitación Santander, A.C. (formerly Instituto Santander Serfin, A.C.) 99.99% 99.99%

Banco Santander, S.A., Fideicomiso 100740. 99.99% 99.99% Fideicomiso GFSSLPT, Banco Santander, S.A. 79.83% 92.75% Santander Holding Vivienda, S.A. de C.V. 99.99% 99.99% Santander Servicios Corporativos, S.A. de C.V. 99.96% 99.96% Santander Servicios Especializados, S.A. de C.V. 99.99% 99.99%

15

Recognition of the effects of inflation in the financial information - Because it operates in a non-

inflationary environment, the Institution suspended recognition of the effects of on January 1, 2008. Up to

December 31, 2007, the recognition of inflation mainly resulted in gains or losses from inflation on monetary

and non-monetary assets and liabilities.

The balances of assets, liabilities and stockholders' equity include the effects of inflation recognized through

December 31, 2007, during which time Mexico was considered to be an inflationary environment as

previously defined under MFRS. The effects of inflation are derecognized on the date on which the assets and

liabilities or components of stockholders’ equity that were adjusted for such effects are derecognized. The

consolidated financial statements as of December 31, 2015 and 2014 only include inflation adjustments

recognized in previous periods, and which correspond to assets, liabilities and stockholders’ equity that have

not yet been derecognized. As established in NIF B-10, Effects of Inflation, a non-inflationary environment is defined as one in which the

cumulative inflation rate of the three preceding years is lower than 26%, and which is projected to maintain

stable inflation rates according to the economic forecasts of government agencies. The cumulative inflation of

the three-year periods preceding December 31, 2015 and 2014 is 11.9% and 11.3% respectively. The inflation

percentage under UDIS rates for 2015, 2014 and 2013 was 2.10%, 4.18% and 3.78% respectively;

consequently, the economic environment qualifies as non-inflationary in both years.

Offsetting of financial assets and liabilities - Financial assets and liabilities are offset in such a way that the

net debit or credit balance is presented on the consolidated balance sheet if the Institution has the contractual

right to offset recognized amounts and the intention to settle the amounts net or realize the asset and settle the

liability simultaneously.

Funds available - Funds available are valued at face value; foreign currency funds available are valued at fair

value using year-end quoted exchange rates.

Foreign currency acquired that will be settled on a date subsequent to the purchase-sale transaction is recognized as restricted funds available (foreign currency receivable). Foreign currency sold is recorded as a credit to funds available (foreign currency deliverable). The offsetting entry is recorded in a debit (credit) settlement account when a sale or purchase is performed, respectively. For financial information presentation purposes, accounts receivable and payable settled in foreign currency

are offset by contract and term and are presented under “Other receivables (net)” or “Creditors from settlement of transactions”, as applicable. Interbank loans executed for a term of three working days or less, as well as other funds available such as correspondent banks or other liquid notes, are also included in this line item. Margin accounts - The margin accounts given in cash (and other cash equivalents) required from entities when performing transactions with derivative financial instruments through recognized stock markets or exchanges are recorded at their face value. In the case of margin accounts granted to the clearinghouse and composed by items other than cash, such as debt instruments or share certificates, the clearinghouse is entitled to sell the component assets embodied in these margin accounts or give them as collateral. Financial assets given as collateral are presented as restricted assets; the respective valuation and disclosure standards are then utilized according to the applicable accounting criterion based on the nature of these assets. Margin accounts are used to ensure the fulfillment of obligations derived from the performance of transactions with derivative financial instruments on recognized stock markets and exchanges. Accordingly, they reflect the initial margin, contributions and withdrawals made during each contractual period.

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Trading securities - Trading securities represent investments in debt and equity securities, in proprietary position and pledged as collateral, which are acquired with the intention of selling them to realize gains from increases in fair value. Upon acquisition, they are initially recorded at fair value, which includes applicable discounts or premiums. Furthermore, the cost is determined by the average costs method. They are subsequently valued at fair value determined by the price vendor engaged by the Institution in accordance with the Provisions of the Commission. The difference between the historical cost, which is determined using the average cost method, of the investments in debt securities plus accrued interest and of equity securities compared with their fair value is recorded in the consolidated statements of income under the item “Net gain on financial assets and liabilities”. The effects of valuation will be treated as unrealized and, therefore, cannot be capitalized or distributed to stockholders until the securities are sold. Fair value is the amount at which an asset may be exchanged or a liability may be settled by informed, willing and interested parties in an arm’s length transaction. The transaction costs for the acquisition of trading securities are recognized in earnings on the acquisition date. Cash dividends of shares are recognized in earnings in the same period in which the right to receive such payment is generated. The exchange gain or loss on foreign currency-denominated investments in securities is recognized in earnings. This heading is used to record outstanding transactions derived from the purchase-sale of assigned, unpaid securities, which are valued and recorded as securities held for trading purposes. The movements of the securities embodied in each transaction are recorded in the respective debit or credit settlement account. The accounting criteria used by the Commission allow for reclassifications of trading securities to available-for-sale only in extraordinary circumstances (for example, a lack of market liquidity, no active market for the instrument, among others), which will be evaluated and, if applicable, validated with the express authorization by the Commission. As of December 31 2015 and 2014, no reclassifications were made. Available for sale securities - Available for sale securities represent debt instruments and equity shares that are not held for purposes of realizing gains derived from increases in fair value and, in the case of debt instruments, those that the entity does not intend or is unable to hold to maturity and, therefore, represent a residual category, i.e., they are acquired for purposes other than those of trading securities or securities held to maturity because the entity intends to trade them at some point in the future prior to maturity. Upon acquisition, they are initially recorded at fair value plus the acquisition transaction cost, including applicable discounts or premiums. They are subsequently valued at fair value. The Institution determines the increase or decrease in the fair value using current prices provided by the price vendor, which uses various market factors for their determination. The yield on debt securities is recorded using the imputed interest or effective interest method depending on the nature of the security; such yield is recognized as earned in the consolidated statements of income under “Interest income”. Unrealized gains or losses resulting from changes in fair value are recorded in comprehensive income items under stockholders’ equity, specifically, under the heading “Result from valuation of available for sale securities, net”, provided such securities were not defined as hedged in a fair value hedging relationship through a derivative financial instrument, in which case they are recognized in earnings. Cash dividends of shares are recognized in earnings in the same period in which the right to receive such payment arises. The exchange gain or loss on foreign currency-denominated investments in securities is recognized in earnings. The accounting criteria of the Commission allow for the transfer of securities classified as "held to maturity" to "available for sale", provided that there is no intention or capacity to hold them to maturity, as well as reclassifications from the category of trading securities to available for sale under extraordinary circumstances (for example, a lack of market liquidity, or when there is no active market for the securities, among others), which should be assessed and, if applicable, validated through the express authorization of the Commission. As of December 31, 2015 and 2014, no reclassifications were made.

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Securities held to maturity - Securities held to maturity are those with fixed or determinable payments and

fixed maturity, which the Institution has both the intention and the ability to hold until maturity. These

securities are initially recorded at fair value plus acquisition transaction costs, including applicable discount or

premium. They are subsequently valued at amortized cost. Interest earned is recorded in the consolidated

statements of income under “Interest income” using the imputed interest or effective interest method, in

accordance with the nature of the instrument.

At December 31, 2015 and 2014, the valuation of the reserve recorded for special CETE-denominated long-

term UDIS is $373. Accordingly, this amount was recorded in the consolidated statements of income under

the heading “Other operating income”. This valuation is canceled based on the acquisition of these special

CETE-denominated UDIS by the Bank of Mexico. Based on the early termination of Debtor Support

Programs, in 2015 and 2014, and given that the Federal Government did not repurchase any special CETE-

denominated UDIS, the Institution did not cancel any portion of this reserve during those years.

The accounting criteria of the Commission allow for the transfer of securities classified as "held to maturity"

to "available for sale", provided that there is no intention or capacity to hold them to maturity, as well as

reclassifications from the category of trading securities to available for sale under extraordinary circumstances

(for example, a lack of market liquidity, or when there is no active market for the securities, among others),

which should be assessed and, if applicable, validated through the express authorization of the Commission.

As of December 31, 2015 and 2014, no reclassifications were made.

Impairment in the value of a financial instrument - The Institution must evaluate whether there is objective

evidence that a financial instrument is impaired as of the consolidated balance sheet date. Impairment is the

condition that arises when the book value of the investments in securities exceeds their recoverable amount.

A financial instrument is considered to be impaired and, accordingly, a loss from impairment is incurred if,

and only if, there is objective evidence of the impairment as a result of one or more events that took place

after the initial recognition of the financial instrument, which had an impact on its estimated future cash flows

that can be reliably determined. It is deemed highly unlikely that one identified event can be the sole cause of

the impairment, and it is more feasible that the combined effect of different events might have caused the

impairment. The expected losses as a result of future events are not recognized, regardless of how probable

they are of occurring.

Objective evidence that a credit instrument is impaired includes observable information such as, among

others, the following events:

a) Significant financial difficulties of the issuer of the instrument;

b) It is probable that the issuer of the instrument will be declared bankrupt or another financial

restructuring will take place;

c) Noncompliance with the contractual clauses, such as default on payment of interest or principal;

d) Disappearance of an active market for the instrument in question due to financial difficulties, or

e) A measurable decrease in the estimated future cash flows of a group of securities since the initial

recognition of such assets, even though the decrease cannot be matched with the individual securities

of the group, including:

i. Adverse changes in the payment status of the issuers in the group, or

ii. Local or national economic conditions which are correlated with defaults on the securities of

the Institution.

Management has not identified objective evidence of impairment of a credit instrument held as of December

31, 2015 and 2014.

Sale and repurchase agreements - Sale and repurchase agreements are those in which the buying party

acquires the ownership of securities and agrees to transfer ownership of identical securities back to the

original selling party at the end of the contractual term and in return for the original purchase price plus a

premium. Unless otherwise agreed, the premium retained by the buying party.

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For legal purposes, sale and repurchase agreements are considered as a sale in which an agreement to

repurchase the transferred financial assets is executed. However, the economic substance of sale and

repurchase agreements is that of a secured financing in which the buying party provides cash as financing in

exchange for obtaining financial assets that serve as collateral in the event of default.

Sale and repurchase agreements are recorded as indicated below:

When the Institution acts as the buying party, on the contract date of the sale and repurchase agreements, the

withdrawal of funds available or a credit settlement account is recognized, with an entry to accounts

receivable, initially at the price agreed, which represents the right to recover the cash paid. The account

receivable will be valued subsequently during the useful life of the sale and repurchase agreements at

amortized cost, recognizing the interest on the sale and repurchase agreements based on the effective interest

method in earnings.

When the Instituion acts as the selling party on the contract date of the repurchase transaction, when the

Institution acts as the selling party, the entry of the cash or asset or a debit settlement account is recognized,

as well as an account payable, initially at the price agreed, which represents the obligation to repay such cash

to the buying party. The account payable will be valued subsequently during the useful life of the sale and

repurchase agreements at amortized cost, recognizing the interest on the sale and repurchase agreements

based on the effective interest method in earnings.

When the transactions performed are considered to be cash-oriented, the transaction is intended to obtain cash

financing by using financial assets as collateral for such purpose; by the same token, the buying party obtains

a return on its investment at a certain rate, and as it is not seeking a specific value, receives financial assets as

collateral to mitigate the exposure to credit risk which it faces in relation to the selling party. In this regard,

the selling party pays the buying party the interest on the cash that it received as financing, calculated based

on the rate negotiated in the sale and repurchase agreements. Also, the buying party obtains yields on its

investment, whose payment is assured through the collateral.

When the transactions performed are considered to be securities-oriented, the intention of the buying party is

to temporarily accept certain specific securities held by the selling party, by granting cash collateral, which

serves to mitigate the exposure to risk faced by the selling party in relation to the buying party. In this regard,

the selling party pays the buying party the interest rate negotiated in the sale and repurchase agreements for

the implicit financing obtained on the cash that it received, which rate is generally lower by comparison than

the rates specified in “cash-oriented” sale and repurchase agreements.

Regardless of the economic intent, the accounting for “cash-oriented” or “securities-oriented” repurchase

transactions is identical.

Collateral granted and received other than cash in sale and repurchase agreements - In relation to the

collateral granted by the selling party to the buying party (other than cash), the buying party recognizes the

collateral received in memorandum accounts, following the valuation guidelines for the securities established

in Accounting Criterion B-9, Custody and Management of Assets (“Accounting Criterion B-9”), issued by the

Commission, in the account named "Custody and management of assets”. The securities vendor presents the

financial asset on its consolidated balance sheet as a restricted asset. It then applies valuation, presentation

and disclosure standards according to the respective accounting criterion.

Memorandum accounts recognized for collateral received by the buying party are cancelled when the sale and

repurchase agreements matures or when the selling party defaults.

When the buying party sells the collateral, the proceeds from the sale are recorded and an account payable for

the obligation to repay the collateral to the selling party (measured initially at the agreed-upon price) is valued

at fair value. If the collateral is pledged as guarantee in another repurchase or resale agreement, it will be

measured at amortized cost (any difference between the price received and the value of the account payable is

recognized in earnings).

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Similarly, if the buying party becomes a selling party due to other sale and repurchase agreements with the same collateral received as guarantee of the initial transaction, the interest on the second sale and repurchase agreements must be recognized in earnings as accrued, according to the implied interest method or effective interest method, while also affecting the account payable valued at amortized cost. For transactions where the buying party sells or pledges as guarantee the collateral received (for example, when another repurchase or resale agreement securities loan transaction is established), memorandum accounts are used to control the collateral sold or pledged as guarantee, which is valued using the standards applicable to custody transactions included in Accounting Criterion B-9 issued by the Commission. Memorandum accounts which are recognized for collateral received that in turn is sold or pledged as collateral by the buyer, are cancelled when the collateral sold is purchased to return it to the selling party, or when the second transaction matures or the other party defaults. Securities loans - A securities loan is a type of transaction in which the transfer of securities is agreed

between the lender and the borrower, with the obligation to return such securities or other substantially similar instruments on a given date, or upon request, with a premium received as consideration. In this transaction, collateral or security in the form of assets permitted under current regulations, other than cash, is requested by the lender from the borrower. For legal purposes, securities loans are considered a sale in which it is agreed to return the securities in question on a specified date. However, the economic substance of securities loans is that the borrower may temporarily use a certain type of security whereby the collateral serves to mitigate the risk exposure faced by the lender in relation to the borrower. Securities loans are recorded as indicated below: At the contracting date of the securities loan, when it acts as the lender, the Institution records the securities transferred in connection with the loan as restricted, and applies the applicable rules for valuation, presentation and disclosure in accordance with the respective accounting treatment. The premium is recorded initially as deferred revenue, recording the debit settlement account or the entry of the cash. The amount of the accrued premium is recognized in earnings through the effective interest method over the effective term of the transaction. When the Institution acts as the borrower, at the contracting date of the securities loan, the Institution records the security subject to the loan received in memorandum accounts, following the valuation guidelines established for securities recognized included in Accounting Criterion B-9 issued by the Commission. The amount of the premium is recognized initially as a deferred charge, by recording the creditor settlement account or the cash outlay. The amount of the premium earned is recognized in results for the year through the imputed interest method or effective interest method for the effective term of the transaction. The security subject matter of the transaction, as well as the collateral delivered, are presented as restricted,

based on the type of financial asset in question. The security subject matter of the transaction, as well as the collateral received, are presented in memorandum accounts under the heading of “Collateral received”.

Derivatives -The Institution carries out two types of transactions with financial derivatives: - For hedging purposes - The objective of which is to mitigate the risk of an open risk position through

transactions with financial derivatives. - For trading purposes - The objective of which is different from that of covering open risk positions by

assuming risk positions as a participant in the derivatives market. The Institution recognizes all its derivatives (including hedging derivatives) as assets or liabilities (depending on the related rights and/or obligations) in the consolidated balance sheet, initially at fair value, which is presumed to be equal to the price agreed in the transaction.

20

Transaction costs that are directly attributable to the purchase of the derivative are recognized directly in

earnings.

Subsequently, all derivatives are valued at fair value without deducting any transaction costs incurred on the

sale or other type of disposal, recognizing the valuation effect in earnings under the heading “Net gain on

financial assets and liabilities”, except when the financial derivative forms part of a cash flow hedging

relationship, in which case the effective portion of the gain or loss on the hedging financial derivative

instrument is recognized in other comprehensive income within stockholders’ equity, while the ineffective

portion is recognized in the results of the year under “Net gain on financial assets and liabilities”.

The rights and obligations of derivatives that are traded in recognized markets or stock exchanges are

considered to have matured when the risk position is closed, i.e., when an opposite derivative with the same

characteristics is traded in such market or stock exchange.

The rights and obligations of derivatives that are not traded in recognized markets or stock exchanges are

considered to have expired when they reach their maturity date, when the rights are exercised by either party

or when the parties early exercise the rights in accordance with the related conditions and the agreed

consideration are settled.

Derivatives are presented under a specific heading of assets or liabilities, depending on whether their fair

value (as a result of the rights and/or obligations they may establish) refers to a debit or credit balance,

respectively. Such debit or credit balances may be offset subject to compliance with the respective offsetting

rules.

Derivative assets and liabilities are segregated between derivatives held for trading purposes and derivatives

held for hedging purposes.

Transactions performed for trading purposes

Warrants:

Warrants are documents which represent a temporary right acquired by the holders in exchange for the

payment of a premium for the issue in Shares or Indexes, whereby such right expires at the end of the

effective term. Therefore, holding such securities implies recognition that the intrinsic value and the market

price of the optional security in the secondary market may vary based on the market price of the reference

assets.

Currency Forward and future contracts:

The currency forward and future contracts are those that establish an obligation to buy or sell an underlying

asset on a future date at a pre-established quantity, quality and price on a trading contract. Both forward and

futures contracts are recorded by the Institution as assets and liabilities in the consolidated balance sheets at

fair value, which theoretically represents the fair value of rights or obligations established in the underlying

asset purchase-sale contract to receive and/or deliver the underlying asset and to receive and/or deliver the

cash equivalent to the underlying asset specified in the contract.


earnings.

Differences between the exchange rate agreed in the currency forward contract for trading purposes and the

monthly forward exchange rate, as well as the valuation effects, are recorded in the consolidated statements of

income under “Net gain on financial assets and liabilities”.

Futures entered into for trading purposes are recorded at market value and the difference between such value

and the agreed-upon price is recorded in the consolidated statements of income.

21

For financial information classification purposes, the asset and liability positions of derivatives that have both

rights and obligations, such as forwards and futures are offset on a contract by contract basis; if the result is a

debit balance, the difference is presented under the asset line item “Derivatives”; and if it is a credit balance,

under the liability line item “Derivatives”.

Option contracts:

Options are contracts that, in exchange for a premium, grant the right, but not the obligation, to buy or sell a

specified number of underlying instruments at a fixed price within a specified period.

The holder of a call has the right, but not the obligation, to buy from the issuer a specified number of

underlying assets at a fixed price (exercise price) within a specified period.

The holder of a put has the right, but not the obligation, to sell a specified number of underlying assets at a

fixed price (exercise price) within a specified period.

Considering the rights granted, options are divided into buy options (calls) and sell options (puts).

Options may be exercised at the end of the specified period (European options) or at any time during such

period (American options); the exercise price is established in the contract and may be exercised at the

holder’s discretion. The instrument used to set this price is the reference value or underlying asset. The

premium is the price paid by the holder to the issuer in exchange for the rights granted by the option.

The Institution records the premium paid for the option on the transaction date as an asset or liability. Any

fluctuations from valuation of the premium at market are recognized in the consolidated statements of income

under “Net gain on financial assets and liabilities”, with the adjustment to the appropriate consolidated

balance sheet account. When an option matures or is exercised, the related premium is canceled against

earnings under “Net gain on financial assets and liabilities”.

Recognized options that represent rights are presented, without offsetting, as a debit balance under the asset

line item “Derivatives”. Recognized options that represent obligations are presented, without offsetting, as a

credit balance under the liability line item “Derivatives”.

Trading option contracts are recorded in memorandum accounts at their exercise price, multiplied by the

number of securities and distinguishing between options traded on the stock market from over-the-counter

transactions, in order to control risk exposure.

All valuation gains or losses recognized before the option is exercised or before its expiration, are treated as

unrealized and are not capitalized or distributed to stockholders until realized in cash.

Swaps:

A swap contract is an agreement between two parties establishing a bilateral obligation for the exchange of a

series of cash flows within a specified period and on dates previously established.

Swaps are initially recognized by the Institution in the consolidated balance sheet as an asset or liability, at

fair value, which presumably is equal to the agreed-upon price.

The Institution recognizes both an asset and a liability arising from the rights and obligations of the

contractual terms, valued at the present value of the future cash flows to be received or delivered according to

the projection of the implicit future rates to be applied, discounted at the market interest rate on the valuation

date using rate curves determined by the market risk area, which are constructed using inputs provided by the

price vendor contracted by the Institution as established by the Commision.


earnings.

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Subsequently, all derivatives other than hedging derivatives are valued at fair value without deducting any

transaction costs incurred during the sale or any other type of disposal, through earnings, except when the

derivative financial instrument forms part of a cash flow hedging relationship, in which case the effective

portion of the gain or loss on the hedging financial derivative instrument is recognized in other

comprehensive income within stockholders’ equity, while the ineffective portion is recognized in the results

of the year.

In the case in which a financial asset arising from rights established in a derivative financial instrument

suffers a deterioration in the counterparty credit risk, the book value must be reduced to the estimated

recoverable value and the loss is recognized in earnings. If the conditions giving rise to the impairment

subsequently reverse, the impairment is reversed up to the amount of the previously recognized impaired loss,

recognizing this effect in earnings when it arises.

A swap contract may be settled in kind or in cash, according to the conditions established.

For purposes of financial statement classification, the asset and liability positions of financial derivatives that

incorporate simultaneous rights and obligations, such as swaps, are offset on a contract by contract basis; if

the offsetting results in a net debit balance, the difference is presented as part of the assets, under the heading

“Derivatives”. If a net credit balance arises, it is presented as part of liabilities under the heading

“Derivatives”.

Derivative hedging transaction

The Institution’s management carries out derivative transactions for hedging purposes, which involve swap

contracts.

Financial assets and liabilities that are designated and comply with the requirements to be accounted for as

hedged items, as well as the derivative financial instruments which form part of the hedge relationship, are

recognized in accordance with the Provisions related to hedge accounting for the recognition of the gain or

loss on the hedge instrument and of the hedged item, as established in Accounting Criterion B-5, Derivatives

and Hedge Transactions issued by the Commission.

A hedge relationship qualifies for the use of hedge accounting when all the following conditions are met:

- Formal designation and sufficient documentation of the hedge relationship.

- The hedge must be highly effective in achieving the offsetting of the changes in fair value or in the

cash flows attributable to the hedged risk.

- For cash flow hedges, it must be highly probable that the forecast transaction that is intended to be

hedged will occur.

- The hedge must be reliably measurable.

- The hedge must be evaluated periodically (at least quarterly).

All hedging derivatives are recognized as assets or liabilities (depending on the rights and/or obligations that

they contain) in the consolidated balance sheet, initially at fair value, which refers to the price agreed for the

transaction.

The result of offsetting the asset and liability positions, whether debtor or creditor, is presented independently

of the hedged primary position, forming part of the heading “Derivatives”. Accrued interest is included in

financial margin in the consolidated statements of income.

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Derivative financial instruments contracted for hedging purposes are valued at the market value and the effect

is recognized according to the type of accounting hedge, as follows: a. Fair value hedge- This represents a hedge of exposure to changes in the fair value of recognized assets

and liabilities or of unrecognized firm commitments, or a portion of both, which is attributable to a

specific risk and which may affect earnings. The primary position for the risk hedged is valued at

market and the hedging derivative instrument at market, and the net effect is recorded in earnings

under the heading "Net gain on financial assets and liabilities”. In fair value hedges, the adjustment to

the book value for the valuation of the hedged item is presented under a separate heading on the

consolidated balance sheet. b. Cash flow hedge- This represents a hedge of exposure to variations in the cash flows of a forecast

transaction which (i) is attributable to a specific risk associated with a recognized asset or liability, or

with a highly probable event, and which (ii) may affect earnings. The hedging derivative instrument is

valued at fair value. The portion of the gain or loss on the hedging instrument that is effective in the

hedge is recorded within other comprehensive income while the ineffective portion is recorded in

results under of "Net gain on financial assets and liabilities ".

The effective hedge component recognized in stockholders’ equity associated with the hedged item is

adjusted to equal the lower (in absolute terms) of the accumulated gain or loss of the hedging

instrument from the start of the hedge, and the accumulated change in the present value of expected

future cash flows of the hedged item from the start of the hedge.

Any remaining gain or loss of the hedging instrument is recognized directly in earnings. The Institution suspends hedge accounting when the derivative instrument has matured, been sold, is canceled

or exercised, when the derivative financial instrument does not attain a high degree of effectiveness to offset

changes in the fair value or cash flows of the hedged item, or when the hedge designation is canceled. By ceasing to apply fair value hedge accounting on a prospective basis, any adjustment to the book value for

the valuation of the hedged item attributable to the hedged risk is amortized in earnings. The amortization is

carried out based on the straight-line method during the remaining life of the hedged item. By suspending cash flow hedge accounting, the accrued gain or loss related to the effective part of the

hedging derivative that was recorded in the stockholders' equity as part of comprehensive income, remains in

stockholders' equity until the effects of the forecast transaction or firm commitment affect earnings. If it is no

longer probable that the firm commitment or the forecast transaction will take place, the gain or loss that was

recognized in the comprehensive income account is recorded immediately in earnings. When the hedge of a

forecast transaction initially qualifies for hedge accounting, but subsequently is not highly effective, the

effects accumulated in comprehensive income within the stockholders’ equity are proportionally carried to

earnings to the degree that the forecast asset or liability affects earnings. Packages of derivative instruments quoted on a recognized market as a single instrument are jointly

recognized and valued (i.e., without individually disaggregating each derivative financial instrument).

Packages of derivative instruments which are not quoted on a recognized market are recognized and valued in

a disaggregated manner for each component derivative. The result of offsetting the asset and liability positions, whether debit or credit, is presented separately from

the hedged item, as part of the heading “Derivatives”. Embedded derivatives - An embedded derivative is a component of a hybrid (combined) financial instrument

that includes a non-derivative contract (known as the host contract) in which certain cash flows vary in a

manner similar to that of an independent derivative. An embedded derivative causes certain cash flows

required by the contract (or all cash flows) to be modified according to changes in a specific interest rate, the

price of a financial instrument, an exchange rate, a price or rate index, a credit rating or index, or other

variables allowed by applicable laws and regulations, as long as any non-financial variables are not specific to

a portion of the contract. A derivative that is attached to a financial instrument but is contractually

transferable independently of that instrument, or has a different counterparty from that instrument, is not an

embedded derivative, but a separate financial instrument (for example, in structured transactions).

24

An embedded derivative is separated from the host contract for purposes of valuation and receives the

accounting treatment of a derivative if all the following characteristics are met:

a. The economic characteristics and risks of the embedded derivative are not closely related to the

economic characteristics and risks of the host contract;

b. A separate financial instrument that has the same terms of the embedded derivative would meet the

definition of a derivative, and

c. The hybrid (compound) financial instrument is not valued at fair value with changes recognized in

earnings (for example, a derivative that is not embedded in a financial asset or a financial liability

valued at fair value should not be separated).

The effects of the valuation of embedded derivatives are recorded under the same line item in which the host

contract is recorded.

A foreign currency embedded derivative in a host contract, which is not a financial instrument, is an integral

part of the agreement and therefore closely related to the host contract provided that it is not leveraged, does

not contain an optional component and requires payments denominated in:

- The functional currency of one of the substantial parties to the contract;

- The currency in which the price of the related good or service that is acquired or delivered is regularly

denominated for commercial transactions around the world.

- A currency which is commonly used in contracts to purchase or sell non-financial items in the

economic environment in which the transaction is performed (for example, a stable and liquid currency

which is commonly used in local transactions, or in foreign trade transactions).

Collateral granted and received for derivatives transactions which are not performed on recognized stock

markets or exchanges - The account receivable generated by granting collateral in cash for derivatives

transactions which are not performed on recognized stock markets or exchanges is presented under the

heading of “Other receivables (net)”, while the account payable generated by receiving collateral in cash is

presented under the heading of “Sundry creditors and other accounts payable”.

Granted collateral other than cash remains under its original heading. The account payable, which represents

the assignee's obligation to restitute sold collateral other than cash to the assignor, is presented in the

consolidated balance sheet under the heading of “Collateral sold or pledged as guarantee”.

The collateral other than cash for which a right is granted to enable it to be sold or given in guarantee is

presented in memoranda accounts under “Collaterals received and sold or pledged as security” heading.

Foreign currency transactions - Foreign currency transactions are recorded at the exchange rate in effect on

the transaction date. Assets and liabilities denominated in foreign currency are adjusted at the year-end

exchange rates determined and published by Central Bank, except for liabilities arising from customer

advances denominated in foreign currency stablish in Bulletin C-9, Liabilities, Provisions, Contingent Assets

and Liabilities and Commitments.

Revenues and expenses from foreign currency transactions are translated at the exchange rate in effect on the

transaction date, except for transactions carried out by the foreign branch, which are translated at the

exchange rate “Fix” in effect at the end of each period.

Foreign exchange fluctuations are recorded in the consolidated statements of income of the year in which they

occur.

Commissions charged and associated costs and expenses - Commissions charged for initial loan granting are

recorded as deferred revenues under “Deferred revenues and other advances”, and are amortized to earnings

under “Interest income”, using the straight line method over the life of the loan, except for those related to

revolving loans, which are amortized over a 12 month period.

25

The commissions collected for restructuring or renewal are added to those originally generated according to

the terms of the preceding paragraph and are recognized as a deferred credit which is applied to results by

using the straight line method during the new credit period. The Commissions recognized after the initial loan grant, those incurred as part of the maintenance of such

loans, or those collected on undrawn loans are recognized in earnings when they are incurred. Moverover, any

type of commissions that are not covered in the aforementioned paragraphs are recognized when incurred in

the results of the year under “Commissions and fee expense”. The Commissions collected for credit card annual fees, whether the initial fee or subsequent renewal fees, are

recognized as deferred credits under “Deferred credits and other advances”, and are amortized over a 12

month period to earnings under “Commission and fee income”. The Commissions collected in connection with the grant of a line of credit that has not been used are

recognized as deferred revenue under “Deferred credits and other advances” in the consolidated balance sheet,

which is amortized to results under “Interest income” using the straight line method over a period of 12

months. If the line of credit is canceled before the conclusion of the 12 month amortization period, the unamortized

balance of commissions collected for lines of credit are recognized to results under “Commission and fee

income” on the date of the cancellation. The incremental costs and expenses associated with the initial loan grant are recognized as a deferred charge

and are amortized against earnings as “Interest expense” during the same accounting period in which income

from collected commissions is recognized. Costs and expenses associated with the granting of loans are solely comprised of those that are incremental

and directly related with the activities that are carried out in connection with the loan origination and include,

for example, the credit evaluation of the borrower, the evaluation and recognition of credit enhancements,

negotiation of credit terms, preparation and documentation process of the loan, and the closing or cancelation

of the transaction, including the portion of employee compensation that is directly related to time incurred in

the development of these activities. Any other costs or expenses, including those related to promotion, advertising, potential customers,

management of existing loans (follow-up, control, recoveries, etc.) and other ancillary activities related to the

establishment and monitoring of loan policies are recognized directly in earnings as incurred under the

respective line item that corresponds to the nature of the cost or expense. Costs and expenses associated with the issuance of credit cards are recognized as a deferred charge, which is

amortized to earnings over a 12 month period under the respective line item that corresponds to the nature of

such cost or expense. For the years ended December 31, 2015 and, 2014, the main items for which the Institution recorded

“Commission and fee income” in the consolidated statements of income are as follows:

Description 2015 2014

Debit and credit card $ 5,196 $ 4,756

Account management 896 816

Collection services 2,114 1,830

Insurance 4,106 3,896

Investment funds 1,193 1,149

Financial advice and public offers 1,537 1,294

Purchase-sale of securities and money market transactions 573 514

Checks trading 257 302

Foreign trade 866 701

Other 889 851

$ 17,627 $ 16,109

26

For the years ended December 31, 2015 and 2014, the main items for which the Institution recorded “Commission and fee expense” in the consolidated statements of income are as follows:

Description 2015 2014

Debit and credit card $ (1,895) $ (1,451) Insurance (18) (103) Investment funds (25) (73) Financial advice and public offers - (1) Purchase-sale of securities and money market transaction (216) (237) Checks trading (23) (33) Other (1,128) (1,309) $ (3,305) $ (3,207) Commission and fee expense (net) $ 14,322 $ 12,902

Performing loan portfolio - The Institution applies the following criteria to classify loans as performing portfolio:

- Loans that are current in the payments of both principal and interest.

- Loans that do not demonstrate the characteristics of non-performing portfolio.

- Restructured or renewed loans which have evidence of sustained payment.

Non-performing loan portfolio - The Institution applies the following criteria to classify uncollected loans as non-performing

– Loans with a single payment of principal and interest at maturity are considered non-performing 30

days after the date of maturity.

– Loans with a single payment of principal at maturity and with periodic interest payments are

considered non-performing 90 days after interest is due after principal is due.

– Loans whose principal and interest payments have been agreed in periodic installments are considered non-performing 90 days after an installment becomes due.

– For loans comprised of revolving loans with two outstanding monthly billing periods or, if the billing

period is not monthly, when payments have been outstanding for 60 or more days.

– Mortgage loans with periodic partial payments of principal and interest are considered non-performing when a payment is 90 days or more past due.

– Customer checking accounts showing overdrafts will be reported in the non-performing portfolio at the

date of the overdraft.

– If the borrower is declared bankrupt, except for those loans which:

i. Continue to receive payment under the terms of that established in Article 43, section VIII of the Commercial Bankruptcy Law, or

ii. Are granted under the terms of Article 75 in relation to Sections II and III of Article 224 of such law.

The aforementioned loans will be transferred to non-performing portfolio when any of the conditions

described in the preceding points are met.

– The immediately due and payable notes referred to in Accounting Criterion B-1, Funds Available, of the Commission, at the time they were not collected within the respective term (two or five days).

27

Non-performing portfolio which are restructured or renewed will remain in the non-performing portfolio until

there is evidence of sustained payment; i.e., performance of payment by the borrower without arrears for the

total amount of principal and interest due for at least three consecutive installments under the loan payment

scheme, or in the case of loans with installments that cover periods in excess of 60 calendar days, the payment

of one installment as established in the accounting criteria of the Commission.

The loan payments referred to by the preceding paragraph must cover at least 20% of principal or the total

amount of any interest accrued under payment restructuring or renewal schemes. However, accrued interest

recognized in memoranda accounts is not considered for this purpose.

Furthermore, loans with a single payment of principal upon maturity and periodic payments of interest that

are restructured or renewed during the credit term, are classified as non-performing portfolio until there is

evidence of sustained payment, as well as those in which at least 80% of the original term of the loan has not

elapsed, which did not cover the total amount of the accrued interest or cover the principal of the original

amount of the loan, and which would have been settled as of the date of renewal or restructuring in question.

The accrual of interest earned on credit transactions is suspended at the time the loan is classified as non-

performing portfolio, including those loans for which accrued interest is capitalized as part of the loan

principal amount in accordance with the respective contract. While a loan remains in the non-performing

portfolio, accrued interest is recorded in memoranda accounts. When this interest on non-performing portfolio

is collected, it is directly recognized in results of the year under the heading of “Interest income”.

With regard to ordinary uncollected accrued interest on loans which are considered as non-performing

portfolio, the Institution creates an allowance for the total amount of the interest at the time the loan is

transferred to non-performing portfolio.

Classification of the loan portfolio and allowance for loan losses-

The Institution must classify their portfolios under the following headings:

a. Commercial: direct or contingent loans, including bridge loans denominated in Mexican pesos or

foreign currency, investment units UDI, multiples of the minimum wage (“VSM or SMG”) and

accrued interest that are granted to entities or individuals with business activities for commercial or

financial purposes. These loans include those granted to financial entities other than interbank loans for

periods of less than three business days, those involving factoring transactions or finance lease

transactions performed with entities or individuals; loans granted to trustees acting under the auspices

of trusts and credit schemes commonly known as “structured” transactions in which an impact to

equity that allows for the for the individual assessment of the risk associated with the scheme.

Likewise, the loans granted to federal entities, municipalities and their decentralized agencies are also

included.

b. Residential mortgage: direct loans denominated in Mexican pesos, foreign currency, UDI or Minimum

Daily Wage (“SMG”), as well as the interest generated, granted to individuals that are intended for the

acquisition, construction, remodeling or improvement of housing, without any speculative purpose;

includes equity loans secured by the borrower's home and those granted for such purposes to the

former employees of the Institution.

c. Consumer: direct loans denominated in Mexican pesos or foreign currency, UDI, multiples of VSM

and accrued interest granted to individuals as a result of credit card transactions, personal loans,

payroll loans (other than those granted through credit cards), loans granted for the acquisition of

durable consumer goods and finance lease transactions performed with individuals. Loans granted to

the former employees of the Institution are also included.

28

The Institution recognizes reserves created to cover credit risks in conformity with such provisions, based on

the following: Commercial portfolio: When classifying the commercial loan portfolio, the Institution considers the Probability of Default, Severity

of the Loss and Exposure to Default, and also classifies the aforementioned commercial loan portfolio into

different groups and establishes different variables for the estimate of the probability of default. The amount of the allowance for loan losses of each loan will be the result of applying the following formula:

iiii EISPPIR

In which: Ri = The amount of the allowance for loan losses to be created for the nth credit.

PIi = The Probability of Default of the nth credit.

SPi = The Loss Severity of the nth credit.

EIi = The Exposure at Default of the nth credit. The probability of default of each credit (PI i) will be calculated by using the following formula:

40

)2ln()500(

1

1

itScoreTotalCredi

i

e

PI

For the above purposes: The total credit score of each borrower is obtained by applying the following formula:

iii reeCreditScoQualitativoreveCreditScQuantitatitScoreTotalCredi 1

In which:

Quantitative credit scorei = Is the score obtained for the nth borrower when evaluating risk factors.

Qualitative credit scorei = Is the score obtained for the nth borrower when evaluating risk factors.

= Is the relative weight of the quantitative credit score.

Unsecured loans The Loss Severity (SPi) of commercial loans without an actual or personal warranties or derived from the loan

will be: a. 45%, for loans that lack any type of coverage by real, personal or credit guarantee b. 75%, for Subordinate Loans; in the case of syndicated loans, these are loans which for payment

priority purposes, are contractually subordinated to those of other creditors. c. 100%, for loans reporting delays of 18 or more months regarding the payments due under originally

agreed terms.

The Exposure at Default (EIi) of each loan is determined based on the following:

I. In the case of uncommitted, utilized credit lines which can be unconditionally canceled or which can

be automatically canceled at any time and without prior notice:

EI i = Si

29

II. In the case of all other credit lines:

%100,*

5794.0

CreditLineAuthorized

SMaxSEI i

ii

In which:

Si : The outstanding balance of the nth credit at the rating date, which represents the loan amount granted

to the borrower, adjusted for accrued interest, less principal and interest payments, as well as

forgiveness of debt, rebates and discounts. In any case, the amount to be rated must not include

uncollected accrued interest recognized in memoranda accounts on the balance sheet for loans included

in the overdue portfolio.

Authorized Credit Line: The maximum authorized credit line amount at the rating date.

The Institution can recognize actual and personal warranties, as well derivatives financial instruments of

credit when estimating the Loss Severity of loans, so as to reduce portfolio rating reserves. In any case, it can

opt to not recognize warranties if they result in larger reserves. For this purpose, the Provisions established by

the Commission are utilized.

Loans granted under the Commercial Bankruptcy Law

This methodology mainly contemplates the consideration of collateral created under the terms of Article 75 of

the Commercial Bankruptcy Law for the determination of the Severity of the Loss by applying certain

adjustment factors or discount percentages for each type of admissible security interest in real or personal

property.

In the case of loans granted under Section II of Article 224 of the Commercial Bankruptcy Law, the Severity

of the Loss will be subject to the following treatment:

In which:

Collateral = Any collateral created under the terms of Article 75 of the Commercial Bankruptcy Law by

applying, as the case may be, the respective adjustment factors or discount percentages to each

type of admissible security interest in real or personal property.

Adjusted Estate = The Estate, as this term is defined in the Commercial Bankruptcy Law, deducting the

amount of the obligations referred to in Section I of Article 224 of such law, and applying a

40% discount to the resulting amount.

Si = Unpaid balance of the credits granted under section II of article 224 of the Commercial

Bankruptcy Law as of the classification date.

In the case of loans granted under Section III of Article 224 of the Commercial Bankruptcy Law, the Severity

of the Loss will be subject to the following treatment:

%5,%451

Si

ssAdjustedMaMinMaxSPi

%5,%45,1

iS

ssAdjustedMaGuaranteesMinMaxSPi

30

In which:

Adjusted Estate = The Estate, as this term is defined in the Commercial Bankruptcy Law, deducting the

amount of the obligations referred to in Section I of Article 224 of such law, and

applying a 40% discount to the resulting amount.

Si = Unpaid balance of the loans granted under Section II of Article 224 of the

Commercial Bankruptcy Law as of the classification date.

Residential mortgage loan portfolio

The Institution, when classifying the housing mortgage loan portfolio, considers the type of loan, the

estimated Probability of Default of the borrowers, the Loss Given Default associated with the value and

nature of the collateral and the Exposure at Default.

Furthermore, the Institution classifies, creates and records the allowances for loan losses on the residential

mortgage loan portfolio as follows:

Due and Payable Amount- Amount the borrower must pay in the billing period, without considering any

previous due and payable amounts that were not paid. If the billing is half monthly or weekly, the due and

payable amounts of the two half months or four weeks in the month, respectively, must be added up so that

the due and payable amount reflects a monthly billing period.

The discounts and rebates may reduce the due and payable amount only when the borrower complies with the

conditions required in the loan contract for such purpose.

Payment Made- Totals the payments made by the borrower in the billing period. Write-offs, reductions,

amounts forgiven, rebates and discounts made to the credit or group of credits are not considered as payments.

If the billing is half monthly or weekly, the payments made for the two half months or four weeks of a month,

respectively, must be added up so that the payment made reflects one full monthly billing period.

The variable "payment made" must be more than or equal to zero.

Value of the Home Vi - The value of the home at the time of the credit origination, restated in accordance with

the following:

I. For loans with an origination date prior to January 1, 2000, in two stages:

a) First stage, based on the SMG

Value of Home 1st Stage = SMG Dec 31, 1999 X Value of Home at Origination

SMG in the month of the origination

Where:

The value of the home on the origination date reflects the home value ascertained through an

appraisal at the time the loan was originated.

b) Second stage, based on the monthly National Consumer Price Index (INPC)

Value of Home = INPC month of classification X Value of Home 1st Stage

INPC Jan 1, 2000

31

II. For loans with an origination date prior to January 1, 2000, in accordance with subsection b) of

numeral I above

Value of Home = INPC month of classification X Value of Home at Origination

INPC month of origination

In any case, the home value at the time of the origination may be restated based on a formal appraisal.

Credit Balance Si - The unpaid balance at the classification date, which represents the amount of the loan

granted to the borrower, adjusted for accrued interest, less any insurance payments which were financed,

collections of principal and interest, as well as reductions, amounts forgiven, rebates and discounts granted, as

the case may be.

Days in Arrears- Number of calendar days at the classification date during which the borrower did not fully

settle the due and payable amount under the terms originally agreed.

Credit Denomination (MON) - This variable will take the value of one (1) when the housing loan is

denominated in UDI, SMG or a currency other than Mexican pesos, and zero when it is denominated in pesos.

Completion of File (INTEXP) - This variable will take the value of one (1) if the selling party of the real estate

property participated in obtaining the proof of income or in contracting the appraisal, and zero in any other

case.

The total amount of reserves to be created by the Institution will be equal to the allowance for loan losses, as

follows:

i

EIi

SPi

PIi

R

Where:

Ri = Amount of allowances for loan losses to be created for the nth credit

PIi = Probability of Default on the nth credit.

SPi = Loss Given Default on the nth credit.

EIi = Exposure at Default on the nth credit.

In any case, the amount subject to the classification must not include uncollected accrued interest recorded on

the consolidated balance sheet, of loans classified within non-performing portfolio.

Consumer loan portfolio

On August 27, 2015, the Commision made certain changes to the methodology applicable to the classification

of consumer loan portfolio consistent with the expected loss model, with the objective of recognizing the

guarantee schemes known as pari passu, or first losses in such rating.

The Institution obtains a loss severity adjusted for real financial guarantees (SP*) by applying the following

formula:

i

i

iiEI

EISPSP

**

32

a) SPi*

= Loss Severity of the nth credit adjusted for financial security in real or personal property;

b) SPi =

65% for loans from the nonrevolving consumer loan portfolio with no collateral different

from the group credit, or

79% for loans from the nonrevolving consumer loan portfolio with no collateral for the

group credit, or

75% for credit card positions and other revolving loans with no collateral.

100% for any of the above-mentioned loans with a number of monthly nonpayments

equal to or in excess of 10 (ATRi M > 10), or its equivalent in less billing periods in

accordance with article 91 Bis 2, section II or article 92, section III, subsection b) numeral

2 of the Provisions.

c) EIi* = which are of a general and mandatory nature and have been applied on a consistent basis.

Accordingly, the statements of income reflect the financial performance of the Institution

during the aforementioned periods. The operations reported herein

d) EIi = Exposure to Default of the nth credit, in conformity with article, 91 Bis 3 and article 92,

section III, subsection c) of the Provisions, when referring to nonrevolving consumer loan

portfolio or credit card portfolio and other revolving loans.

The aforementioned group loan refers to the loans included within the nonrevolving consumer loan portfolio,

with a weekly or half monthly billing period, which is granted to groups of persons in which each member is

held jointly and severally liable for the total payment of the loan, although the classification of such loan is

made individually for each member of the group.

For the recognition of the personal property collateral registered in favor of the Institution in the sole registry

of personal property collateral referred to in the Code of Commerce, the Institution separates each loan into

the portions that are covered and not covered by such collateral and uses a 60% Loss Severity for the portion

of such loans that are covered with the personal property collateral.

The exposed portion of the loan maintains the respective percentage and the amount of the allowance for loan

losses

For purposes of recognizing personal property collateral and credit insurance in the calculation of the loan

reserves referred to in the Provisions, the Institution ensures that they are granted by business corporations

and comply with the requirements established in Exhibit 25 of the Provisions.

In this regard, the Institution recognizes the protection of the personal property collateral and the credit

insurance referred to in the preceding paragraph, for which it utilizes the following procedure:

1. It identifies the covered portion and the exposed portion of the loan.

2. The allowance for loan losses of the covered portion are determined in accordance with the following:

i. The PIi of the security is obtained in accordance with article 112 of the Provisions, which substitutes

the PIi of the borrower.

ii. The SPi will be that indicated in subsection b) above, as the case may be.

iii. The EIi is determined in conformity with articles 91 Bis 3 and 92, section III, subsection c) of the

Provisions, depending on whether it involves the nonrevolving consumer loan portfolio or credit card

portfolio and other revolving loans, respectively.

iv. The allowance for loan losses are determined by using the formulas contained in articles 91 Bis and

92, section II of the Provisions, depending on whether it involves the nonrevolving consumer loan

portfolio or credit card portfolio and other revolving loans, respectively.

33

The allowance for loan losses of the exposed portion are determined by using: i. The PIi of the borrower, in the case of loans from the nonrevolving consumer loan portfolio, is

determined in conformity with article 91 Bis 1, sections I, II, III and IV of the Provisions, as the case

may be, and in the case of credit card loans and other revolving loans, in conformity with article 92,

section III, subsection a) of the Provisions. ii. The SPi of the borrower, in the case of loans from the nonrevolving consumer loan portfolio, is

determined in conformity with article 91 Bis 2, sections I and II of the Provisions, as the case may be,

and in the case of credit card loans and other revolving loans, in conformity with article 92, section III,

subsection b), of the Provisions. If the Institution is beneficiary of a guarantee scheme known as pari passu or first losses granted by other

financial institutions or entities, it may adjust the percentage of the allowance for loan losses applicable to the

loan or group of loans with similar characteristics which are covered by such schemes, in accordance with the

procedures indicated below, depending on whether it is beneficiary of a pari passu or first losses coverage

scheme. If it is beneficiary of a pari passu coverage scheme, it creates the amount of the allowance for loan losses by

applying the following formula:

RpaMed_i = (PIi × SPi × EIi) × (1 − %Cob PaMed i) Where: PIi = Probability of Default on the nth credit in conformity with articles 91 Bis 1 and 92,

section III, subsection a) of the Provisions, as the case may be, in relation to the

nonrevolving consumer loan portfolio, or the credit card portfolio and other revolving

loans. SPi = Loss Severity of the nth credit in accordance with articles 91 Bis 2 and 92, section III,

subsection b), numeral 1; as well as the above article 97 Bis 6, section II, subsection b)

of the Provisions, as the case may be, in relation to the nonrevolving consumer loan

portfolio, or the credit card portfolio and other revolving loans. EIi = Exposure to Default of the nth credit in conformity with articles 91 Bis 3 and 92, section

III, subsection c) of the Provisions, as the case may be, in relation to the nonrevolving

consumer loan portfolio, or the credit card portfolio and other revolving loans %Cob PaMed i = Percentage covered in conformity with the pari passu coverage scheme which refers to

the nth credit in particular. Furthermore, the amount of the respective allowance for loan losses is established for the covered portion of

the loan in conformity with the following:

RPCPaMed_i = EIi × %Cob PaMed I × PIGA_i × SPGA_i Where: RPCPaMed_i = Amount of reserves to be created for the covered portion of the nth credit. PIGA_i = Probability of Default of the surety in conformity with article 112 of the Provisions. SPGA_i = The Loss Severity of the surety in conformity with article 114 of the Provisions. If the Institution is beneficiary of a first losses coverage scheme, the allowance for loan losses for each loan or

group of loans with similar characteristics after the recognition of the coverage of the first losses scheme

(RPCpp), determining the covered percentage and the percentage of total reserves without coverage of the loan

or group benefiting from the scheme, are established in conformity with the following:

34

a) Percentage covered by the first losses coverage scheme (%Cobpp)

%Cobpp =

Mto_Cobpp

∑ n Si i= 1

Where: Mto_Cobpp = Limited amount intended to cover the first losses which might be generated from the

default on a loan or a group of loans with a specific number of loans at the classification

date.

∑ n Si = i= 1

Sum of the unpaid balances of the loans, when the first losses coverage scheme covers a loan portfolio.

If the scheme covers a single loan, the denominator will be substituted by Si, defined in conformity

with articles 91 Bis 3 and 92, section III, subsection c), of the Provisions, as the case may be, for the

nonrevolving consumer loan portfolio or credit card portfolio and other revolving loans. b) The percentage of total reserves without coverage of the loan or group of loans benefiting from the

first losses coverage scheme is the difference between the percentage of total reserves of the loan or

group of loans before the recognition of the benefit from the coverage and the percentage covered by

the first losses coverage scheme (Difpp). This difference provides the percentage of total reserves of the

loan or group of loans not covered by the scheme and is obtained from the following formula:

𝐷𝑖𝑓pp = %𝑅𝑉𝐴𝑆𝐶𝑜𝑃 −%𝐶𝑜𝑏pp

Where: %𝑅𝑉𝐴𝑆𝐶𝑜𝑃 = Percentage of total reserves of the loan or portfolio benefiting from the first losses

coverage scheme

%𝑅𝑉𝐴𝑆𝐶𝑜𝑃 =

𝑅𝑉𝐴𝑆𝐶𝑜𝑃

∑ n Si i= 1

𝑅𝑉𝐴𝑆𝐶𝑜𝑃 = Total reserves of the loan or of the n credits of the portfolio before recognition of the first

losses coverage scheme; i.e., without considering applicable mitigating factors of the Loss

Severity, according to that established in the guarantees scheme contract in effect on the

classification date which will be calculated in accordance with the following formula:

n

RVASCoP

= ∑ Ri = ∑ PIi × SPi × EIi

i = 1 i = 1

Ri, PIi, EIi, SPi = In conformity with articles 91 Bis and 92, section II of the Provisions, as the case may be,

for nonrevolving consumer loan portfolio, or credit card portfolio and other revolving

loans %Cobpp = In conformity with that established in subsection a) above c) The amount of reserves of the loan or group of loans portfolio is obtained after the recognition of the

benefit from the coverage of the first losses coverage scheme (RCPpp), in conformity with the

following:

1. If the value of Difpp is equal to or lower than zero, the Institution does not establish allowance

for loan losses for the portfolio benefiting from the first losses coverage scheme, except for that

indicated in subsection d) below.

35

2. If the value of Difpp is greater than zero, the Institution establishes the allowance for loan losses

up to the amount which, added to the value of the security, are equal to the total amount of

reserves of the portfolio; in other words:

RPCpp = RVASCoP

- Mto_Cobpp

d) Furthermore, for the loan or group of loans benefiting from the first losses coverage scheme of

identified loans with similar characteristics, the Institutionestablishes the allowance for loan losses

resulting from multiplying the Probability of Default and the Loss Severity of the security, by the

minimum amount between the total reserves of the n credits of the portfolio before the recognition of

the coverage of the first losses scheme and the limited amount intended to cover the first losses which

might be generated from default on a loan or a group of loans with a given number of loans.

RPCpp = Min (RVASCoP

, Mto_Cobpp) × PIGA × SpGA

Where: RPCpp = Amount of reserves to be established for the percentage of the loan or portfolio covered. RVAS

CoP = Total reserves of the loan or the n loans in the portfolio before recognition of the coverage

of the first losses scheme; i.e., without considering mitigating factors of the applicable

Loss Severity, established in the guarantees scheme contract in effect on the classification

date. Mto_Cobpp = Limited amount intended to cover the first losses which might be generated from the

default on a loan or a portfolio with a given number of loans. PIGA = Probability of Default on the surety in conformity with article 112 of the Provisions. SpGA = The Loss Severity of the surety in conformity with article 114 of the Provisions. The consumer loan portfolio related to credit card transactions: The Institution classifies, creates and records an allowance for loan losses for the consumer loan portfolio

related to credit card transactions, while considering the following:

Topic Description

Balance payable Amount payable as of the cutoff date on which the payment period in which the

borrower must pay the Institution begins.

Payment made Sum of payments made by the borrower during the payment period.

Credit limit Maximum authorized limit of the credit line as of the cutoff date on which the

payment period begins.

Minimum payment

due

Minimum amounts as of the cutoff date on which the payment period that the

borrower must cover to comply with his contractual obligation begins.

Default Event that occurs when the payment made by the borrower does not cover the

minimum payment required by the Institution in the respective account statement.

To estimate the number of defaults, the Institution must apply the following table of

equivalencies depending on the billing frequency:

Billing Number of defaults

Monthly 1 monthly default = 1 default

Bi-weekly 1 bi-weekly default = 0.5 defaults

Weekly 1 weekly default = 0.25 defaults

36

The total allowance amount that must be established by the Institution for this portfolio is equal to the sum of

the reserves for each loan, which are obtained as follows:

iiii EISPPIR

Where:

Ri = Amount of allowances to be created for the nth credit.

PIi= Probability of Default of the nth loan.

Spi= Loss Given Default of the nth loan.

Eii= Exposure at Default of the nth loan.

In order to estimate the reserves, it is necessary to calculate the Probability of Default, the Loss Given Default

and the Exposure at Default.

Notwithstanding the provisions of this methodology, the Institution must not create allowance for loan losses

in which the balance payable is simultaneously equal to zero and the payment made is greater than zero.

Credit card transactions in which the balance payable is simultaneously equal to or lower than zero and the

payment made is zero will be considered inactive and the related reserves will be obtained as follows:

iR = 2.68% * (Credit Limit - Recoverable Balance)

Where:

Recoverable balance = Amount that represents a right for the borrower, resulting from a payment or bonus as

of the cutoff date on which the payment period begins.

For classification purposes, inactive card reserves will have a B-1 risk rating.

The percentage used to determine the allowance for each loan is the result of multiplying the Probability of

Default by Loss Given Default.

The reserve amount will be the result of multiplying the above percentage by the exposure to default.

Non-revolving consumer loan portfolio:

The Institution may recognize the real collateral, personal collateral and credit-based collateral in the estimate

of the Loss Given Default on the loans, with the aim of reducing the allowance derived from the portfolio

classification. For such purpose, they will use the provisions established by the Commission.

Eligible real collateral may be financial and non-financial. Furthermore, only real collateral that complies

with the requirements established by the Commission will be recognized.

i

EIi

SPi

PIi

R

Where:

Ri = Amount of allowances to be created for the nth credit.

PIi = Probability of Default on the nth credit.

SPi = Loss Given Default on the nth credit.

EIi = Exposure at Default on the nth credit.

37

Acquisition of loan portfolios

The contractual value of the portfolio acquired must be recognized under the loan portfolio line item as of the

portfolio acquisition date based on the portfolio type classified by the originator; any difference in relation to

the acquisition price is recorded as follows:

a) When the acquisition price is lower than the portfolio’s contractual value, the difference is recognized

in results of the year under the heading “Other operating income (expense)”, up to the amount of the

allowance for loan losses recognized in accordance with the Commission’s rules, and any remaining

amount as a deferred credit, which will be amortized on a proportional basis in relation to the

contractual value of the loan;

b) When the acquisition price of the portfolio is higher than its contractual value, a deferred charge is

recognized, which will be amortized on a proportional basis in relation to the contractual value of the

loan;

c) Regarding the acquisition of revolving credits, such difference will be recognized directly to results of

the year on the acquisition date.

The allowance for loan loss is applied to the results of the year for all types of acquired loans, considering any

noncompliance arising since the origination of these loans.

Additional portfolio allowance:

At December 31, 2015 and 2014, the Institution has recorded addtional allowance for loan losses over and

above the minimum requirements established by the standard model issued by the Commission, which

considers the allowance created during the restructuring process, known as the “Commerce Fund” authorized

by the Commission through Document No. 601-I-DGSIF “C”-38625 in March 2001. These amounts were

recognized in 2001 and recorded to “Retained earnings” in accordance with the authorization issued by the

Commission for the commercial and mortgage portfolio. The total amount of these additional allowances is

$44 and $107, respectively. This authorization also establishes that loan portfolio recoveries must be applied

to “Retained earnings” instead of being credited in the consolidated statements of income. For the years ended

December 31, 2015 and 2014, the Institution has recovered $14 and $20, respectively.

At December 31, 2015 and 2014, the allowance for loan losses includes the allowance created to cover the

cost of credit portfolio support programs.

Evidence of sustained loan payment:

Loans with a history of payment noncompliance that will be restructured are maintained in the loan stratum in

effect prior to the restructuring, until evidence is obtained of sustained loan payment under the terms

established by the Commission.

Restructuring and renewal processes

A restructuring process is a transaction derived from any of the following situations:

a) The extension of credit enhancements given for the credit in question, or

b) The modification of original credit or payment scheme conditions, which include:

- the modification of the interest rate established for the remainder of the loan period;

- the change of currency or account unit, or

- The concession of a grace period regarding the payment obligations detailed in the original

credit terms, unless this concession is granted after the originally-agreed period, in which case it

is considered as a renewal.

38

Restructuring transactions do not include those which, at the restructuring date, relate to loans from borrowers

who are in compliance with the original terms for the total amount due for principal and interest and which

only modify one or more of the following original credit conditions:

Credit enhancements: only when they imply the extension or substitution of credit enhancements for others of

higher quality.

Interest rate: when the agreed interest rate improves.

Currency: provided the respective rate is applied to the new currency.

Payment date: only if the change does not involve exceeding or modifying payment periodicity. Modifying

the payment date must not permit nonpayment in any given period.

A renewal is a transaction which extends the loan duration or maturity date or when the loan is paid at any

time using the proceeds of another loan contracted with the same entity in which one of the parties is the same

debtor or another individual or entity within a common shareholding group or with other equity relationships

representing a joint risk. A loan is not considered to be renewed when borrowings are made during the term of

a pre-established credit line.

Restructured or renewed non-performing loans remain in the non-performing portfolio until evidence of

sustained payment is obtained; i.e., timely borrower payment compliance as regards to the total amount of

principal and interest due, with a minimum of three consecutive payments within the loan payment scheme or,

in the case of loans with payment periods exceeding 60 calendar days, the settlement of one payment, as

established by the accounting criteria issued by the Commission.

The loan payments must cover at least 20% of principal or any interest accrued under the restructuring or

renewal payment scheme. Accrued interest recognized in memoranda accounts is not considered for this

purpose.

If a restructuring or renewal process is used to consolidate different loans granted to the same borrower in a

single loan, the treatment applied to the total balance resulting from this restructuring or renewal process

reflects the treatment given to the lowest rated component loan.

Current loans other than those with a single principal payment and the payment of interest accrued

periodically or at maturity, which are restructured or renewed before at least 80% of the original credit period

has elapsed are only classified as performing portfolio when the borrower has a) settled all accrued interest,

and b) paid the principal of the original loan amount which was due at the renewal or restructuring date.

If all the conditions described in the preceding paragraph are not fulfilled, loans are classified as non-

performing portfolio from their restructuring or renewal date and until evidence of sustained payment is

obtained.

Current loans other than those involving a single principal payment, the payment of interest in periodic

installments or in one lump-sum payment at maturity and which are restructured or renewed during the final

20% of the original loan period are only considered as portfolio when the borrower has a) settled all accrued

interest; b) paid the original loan amount due at the loan renewal or restructuring date and, c) paid 60% of the

original loan amount.

If all the conditions described in the preceding paragraph are not fulfilled, loans are classified as non-

performing portfolio from their restructuring or renewal date and until evidence of sustained payment is

obtained.

Loans involving a single principal payment, the payment of interest in periodic installments or in one lump-

sum payment at maturity and which are restructured during the loan period or renewed at any time are

classified as non-performing portfolio until evidence of sustained payment is obtained.

39

Loans which are initially classified as revolving and which are restructured or renewed at any time are only

considered as performing portfolio when the borrower has settled all accrued interest, the loan has no overdue

billing periods and the elements needed to justify the borrower’s payment capacity are available, i.e., it is

highly likely that the borrower will settle the outstanding payment.

Other receivables, net - The Institution has a policy of reserving against results, those accounts receivable

identified and not identified within 60 days following the initial recording, and/or those items which are

known to be unrecoverable from initial recognition.

Foreclosed assets, (net) - Assets acquired through judicial foreclosure are recorded on the date the approval

ruling of the bid through which the foreclosure was determined is executed. Property received in lieu of payment is recorded at the lower of net realizable value or cost on the date on

which the related deed is executed or the date that delivery or transfer of the property is formalized. The value of foreclosed assets recognized is equal to the lower of their cost or fair value after deducting the

strictly indispensable costs and expenses incurred for foreclosure purposes. The valuation methodology used for the valuation allowances on foreclosed assets or goods received as

payment establishes the quarterly creation of additional provisions to recognize the potential decrease in value

of foreclosed assets, whether real property or movable goods, received through legal orders, out-of-court

settlements or as payment, as well as collection rights and investments in securities received as foreclosed

assets or as payment. The valuation allowance on foreclosed assets is recognized under “Other operating income” in earnings, in

accordance with the procedure established by the Commission based on the time elapsed as of the foreclosure

or payment in kind, by establishing a spread in terms of the deadline and applying a reserve percentage for

and real estate and non-real estate assets. If realization problems are identified regarding the values of foreclosed real estate, the Institution records an

additional valuation allowance based on estimates prepared by its management. If valuations made after the foreclosure or payment in kind result in the recognition of a decrease in value of

the collection rights, values, real estate or non-real estate assets, the reserve percentages indicated in the

Provisions may be applied to such adjusted value.

Property, furniture and fixtures, (net) - Property, installation expenses and leasehold improvements are

recorded at acquisition cost. The assets currently on hand that were acquired prior to December 31, 2007 were

adjusted for inflation by applying factors derived from the UDI from the date of acquisition until such date.

The related depreciation and amortization are recorded by applying a percentage determined based on their

estimated economic useful lives or, in the case of leasehold improvements, based on the period for which

contracts are executed with leaseholders, which is an average of five years, extendable for another similar

period when requested by the leaseholder. When a property is held for sale, it is recorded at the lower of its carrying amount or net realizable value,

estimated by the Institution’s management. Furniture and fixtures are recorded at their acquisition cost; this amount was restated at December 31, 2003

by applying UDI factors at that date. As of that date, the acquisition of furniture and fixtures was considered

as a monetary item for which the restatement effect was recognized until December 31, 2007 as part of the

monetary position result within the results of those years. The respective depreciation is recorded by applying

a percentage determined according to the estimated economic useful life of these goods to their restated cost

until the date of the most recent restatement or based on acquisitions made since January 1, 2004.

Permanent investments - Are represented by permanent investments made by the Institution in entities where

it has neither control, joint control, or significant influence, are initially recorded at acquisition cost. Any

dividends received are recognized in current earnings. Permanent investments are subsequently, valued under

NIF C7, Investments in Associates, Joint Ventures, and Other Investments.

40

Income tax - Income Tax (“ISR”) is recorded in earnings of the year in which they are incurred. In order to

recognize the deferred tax, the Institution determines if it will cause "ISR" based on financial and tax

projections and recognizes the deferred tax. The Institution determines the deferred tax on the temporary

differences, tax losses and tax credits, from the initial recognition of the items and at the end of each period.

Deferred taxes derived from temporary differences are recognized using the assets and liabilities method,

which compares the accounting and tax values of assets and liabilities. This comparison produces deductible

and taxable temporary differences, which along with tax losses and tax credit from the un-deducted

allowances for loan losses, are then multiplied by the currently enacted tax rate that is projected to be in effect

when the temporary differences will reverse, or when the tax carryforward benefit is realized. The amounts

arising from these three aforementioned items form part of the recognized deferred tax asset and liability.

Management records a reserve for certain deferred tax assets to recognize only the deferred tax asset for

which there is a high probability of recovery over a short-term period, considering for this treatment the

amount generated by the tax benefit for un-deducted allowances for loan losses expected to reverse in

accordance with the financial and tax projections prepared by management. Therefore, the effect of such tax

benefit is not fully recorded. The deferred tax is recorded either to earnings or stockholders’ equity,

depending on the classification of the item originating the deferred tax.

Employee Statutory Profit-sharing - The Institution has determined its Employee Statutory Profit-sharing

obligation (“PTU”) in accordance with Article 9 of the Income Tax Law.

Likewise, it recognizes a deferred PTU asset when realization of future economic benefits is probable and

when there is no indication that conditions will change in such a way that the benefits will not be realized as a

result of variations between the accounting and tax bases used to calculate PTU (deductible temporary

differences). A deferred PTU provision is recognized when a liability is likely to be settled in the future and

when there is no indication that likely to change as a result of variations between the accounting and tax bases

used to calculate la PTU (accruable temporary differences).

Current and deferred PTU are presented in the consolidated statement of income under the heading of

“Administrative and promotional expenses”.

Other assets (net) - Software, system developments and intangible assets are recorded originally at the

acquisition cost, and adjusted for inflation through December 31, 2007, using the factors derived from the

UDIs.

The amortization of software, internally developed information technology and intangible assets with defined

lives is calculated using the straight line method over their estimated useful lives.

Furthermore, the heading “Other assets (net)” includes financial instruments maintained by the pension and

retirement fund held in custody by Casa de Bolsa as well as mortgage loans granted to employees with the

fund’s resources. The fund assets that are to be used to cover employee pension plan and seniority premiums

are comprised of both investments and loans.

The investments in securities acquired to cover the pension plan and seniority premium are recorded at market

value.

For the purposes of presentation in the consolidated financial statements, if the investment in securities

acquired to cover the pension plan and seniority premium exceed the liability recognized, such excess will be

presented under the heading “Other assets (net)”. If the value of such assets is less than the related

obligations, the amount is recorded within the heading of “Sundry creditors and other payables”.

Goodwill - Represents the amount by which the acquisition consideration exceeds the fair value of the net

assets of the acquired entity at the acquisition date, which is not applied and is subject to at least annual

impairment tests.

41

Impairment of long-lived assets in use - The Institution reviews the book value of long-lived assets in use

when evaluating for indicators that such book value might not be recoverable by considering the higher of the

present value of net future cash flows or the net sales price, in the event of its disposal. The impairment is

recorded when the book value exceeds the higher of the aforementioned values. The impairment indicators

considered for this purpose are, among others, operating losses or negative cash flows generated during the

period, combined with a history or projection of losses, depreciation and amortization charged to earnings as

revenue percentages, are significantly higher than those of prior years, the services rendered, competition and

other economic and legal factors.

Provisions - Provisions are recognized when there is a present obligation derived from a past event, for which

the use of economic resources is deemed probable, and which can be reasonably estimated.

Direct employee benefits - These are valued in proportion to the services rendered, considering current wages,

and the liability is recognized as it is accrued. It includes mainly employee profit sharing payable and

incentives (bonuses).

Labor obligations - In accordance with the Federal Labor Law, the Institution has obligations for severance

benefits, pensions and seniority premiums payable to employees who cease rendering their services under

certain circumstances; also, there are other obligations derived from the collective bargaining agreement. The

Institution's policy is to record the liabilities for severance, pensions, postretirement medical benefits,

compensations and seniority premiums as they are accrued based on actuarial calculations using the projected

unit credit method, applying nominal interest rates, as established in Note 23 to the consolidated financial

statements. Therefore, a liability is recognized representing the present value of estimated future cash flows

required to settle the obligation for these benefits at the projected retirement dates of all the employees

working in the Institution.

The Institution amortizes in future periods the actuarial gains and losses for the pension, postretirement

medical benefits plans and seniority premium, in accordance with the terms of NIF D-3, Employee Benefits.

In relation to severance payments, the actuarial gains and losses are recognized in earnings when they arise.

Share-based payments - The Institution recognizes share-based payment plans according to NIF D-8, Share-

based Payments (NIF D-8). Under this NIF, the Institution's compensation plan is considered as a share-based

transaction which can be settled in cash. Share-based transactions which can be settled in cash assigned to

officers who provide their services to the Institution are valued according to the fair value of these equity

instruments at their assignment date. Details related to the termination of the fair value of transactions

involving share-based payments which are settled through capital instruments are presented in Note 30.

The Institution recognizes the services received and the liability payable for such services as they are

provided. If the rights to increases in value of the shares vest when the employees complete a specified period

of service, the Institution recognizes the services received with a liability when the services are received. In

contrast, if the rights to increases in value of the shares vest immediately, the services received and the

liability are recognized immediately in relation to the increase in the value of the shares.

The liability is valued upon initial recognition and at each period end through settlement at the fair value of

the rights to increases in value of the shares, taking into consideration the terms and conditions of the grant

and the manner in which the goods or services are received.

The fair value determined on the date when share-based payments made through capital instruments take

place is recorded in the consolidated statements of income under the heading of “Administrative and

promotional expenses” by using the straight line method during the period based on the estimated value of

the capital instruments which will eventually be assigned. At the end of each reporting period, the Institution

reviews the estimated number of capital instruments which it expects to assign.

Effects of restatement of stockholders’ equity - This represents paid-in capital and other capital restated up to

December 31, 2007 using the factor derived from the value of the UDIS. As of 2008, given that the Institution

operates in a non-inflationary environment, the effects of inflation of the period for contributed and earned

capital are not recognized.

42

Financial margin - The financial margin of the Institution is composed of the difference between total

interest income less interest expense.

Interest income is composed of the yields generated by the loan portfolio, based on the terms established in

the contracts executed with the borrowers, the negotiated interest rates, the application of interest collected in

advance, and the premiums or interest on deposits in financial entities, bank loans, margin accounts,

investments in securities, sale and repurchase agreements and securities loans, as well as debt placement

premiums, commissions charged on initial loan grants, and net equity instrument dividends.

Interest expense is composed of premiums, discounts and interest on deposits in the Institution, bank loans,

sale and repurchase agreements and securities loans, and subordinated debentures, as well as debt placement

discount and issuance expenses. The amortization of costs and expenses related to initial loan granting is also

included under interest expense.

Both interests income and expense are periodically adjusted based on market conditions and the economic

environment.

As of December 31, 2015 and 2014, the main items comprising the financial margin are:

2015

Amount (In millions)

Mexican pesos US dollars Total

Interest income:

Interest and yield on loan portfolio $ 36,722 $ 2,309 $ 39,031

Interest and yield on loan portfolio

related to credit card transactions 9,794 - 9,794

Interest and yield on securities 10,644 67 10,711

Interest on funds available 1,224 98 1,322

Interest and premium on sale and

repurchase agreements and securities

loans 1,841 - 1,841

Interest on margin accounts 347 19 366

Commissions collected on loan

originations 733 - 733

Total interest income 61,305 2,493 63,798

Interest expense:

Interest from demand deposits (3,156) (38) (3,194)

Interest from time deposits (4,325) (44) (4,369)

Interest on bank and other loans (1,928) (179) (2,107)

Interest from credit instruments issued (670) (691) (1,361)

Obligation interest - (1,737) (1,737)

Interest and premium on sale and

repurchase agreements and securities

loans (8,445) - (8,445)

Total interest expense (18,524) (2,689) (21,213)

Financial margin $ 42,781 $ (196) $ 42,585

43

2014

Amount (In millions)

Mexican pesos US dollars Total

Interest income: Interest and yield on loan portfolio $ 31,007 $ 2,473 $ 33,480 Interest and yield on loan portfolio

related to credit card transactions 9,725 - 9,725 Interest and yield on securities 9,089 118 9,207 Interest on funds available 1,326 58 1,384 Interest and premium on sale and

repurchase agreements and securities loans 3,038 - 3,038

Interest on margin accounts 269 9 278 Commissions collected on loan

originations 783 - 783

Total interest income 55,237 2,658 57,895 Interest expense:

Interest from demand deposits (3,071) (27) (3,098) Interest from time deposits (4,301) (29) (4,330) Interest on bank and other loans (1,758) (116) (1,874) Interest from credit instruments issued (541) (611) (1,152) Obligation interest - (1,783) (1,783) Interest and premium on sale and

repurchase agreements and securities loans (8,131) - (8,131)

Total interest expense (17,802) (2,566) (20,368)

Financial margin $ 37,435 $ 92 $ 37,527

Net gain on financial assets and liabilities - As of December 31, 2015 and 2014 the main items comprising

the Net gain on financial assets and liabilities are as follows:

2015 2014

Valuation result Foreign exchange $ 719 $ (101) Derivatives 8,225 3,918 Equity shares (43) (79) Debt instruments (967) 472

7,934 4,210 Purchase-sale result

Foreign exchange (1,407) (688) Derivatives (5,137) (945) Equity shares 87 54 Debt instruments 803 322

(5,654) (1,257)

Total $ 2,280 $ 2,953

Earnings per share - Basic earnings per share is calculated by dividing the net income attributable to

controlling interest from continuing operations (excluding extraordinary items) by the weighted average

number of shares outstanding in each period, thus giving a retroactive effect to shares issued due to the

capitalization of additional paid-in capital or retained earnings. For the years ended December 31, 2015 and

2014, the average number of weighted outstanding shares was 80,855,403,803 in both years; the basic

earnings per ordinary share derived from continuing operations is $0.18 pesos and 0.17 pesos (face value)

respectively.

44

The determination of earnings per share and diluted earnings per share at 31 December 2015 and 2014 is as

follows:

2015 2014

Income

Shares

Weighted

Earnings

per Share

(in

Mexican

pesos) Income

Shares

Weighted

Earnings

per Share

(in

Mexican

pesos)

Earnings per share 14,186 80,855,403,803 0.18 14,053 80,855,403,803 0.17 Treasury shares - - - - Diluted earnings per share 14,186 80,855,403,803 0.18 14,053 80,855,403,803 0.17 Less income:

Discontinued operations - - - - Diluted earnings per share from

continuing operations 14,186 80,855,403,803 0.18 14,053 80,855,403,803 0.17

Comprehensive income - The comprehensive income amount presented in the consolidated statement of changes in stockholders' equity is the effect of transactions other than those performed with the stockholders of the Institution during the period and is represented by the net profit plus the recovery effects of the allowance for loan losses which were previously applied to the retained earnings; the valuation effect of securities available for sale; the valuation effect of cash flow hedges; the initial effect derived from the first application of the consumer portfolio rating methodology to credit card transactions; the portfolio of credits granted to Federal Entities and Municipalities and the housing mortgage credit portfolio, according to the accounting criteria and special authorizations issued by the Commission. These amounts were directly recorded in stockholders' equity, net of the respective income tax. Consolidated statement of cash flows - The consolidated statement of cash flows indicates the Institution's capacity to generate cash and cash equivalents, as well as the manner in which it utilizes these cash flows to cover its requirements. The consolidated statement of cash flows is prepared according to the indirect method by using the net result of the period, as required by Accounting Criterion D-4, Cash Flow Statements, of the provisions. The consolidated statement of cash flows, together with the rest of the consolidated financial statements, provides information that helps to: Assess changes in the assets and liabilities of the Institution and in its financial structure. Assess the amounts and dates of collection and payments to adapt to the circumstances and the

opportunities to generate and/or apply Funds available. Memoranda accounts (see Note 33) - – Contingent assets and liabilities:

The amount of the financial penalties determined by an administrative or court authority, including the Commission, is recorded, until the obligation to pay these fines is fulfilled and after the appeals process has been exhausted.

– Credit commitments:

This item represents the amounts of unused letters of credit granted by the Institution, which are considered irrevocable commercial credit.

Items under this account are subject to classification.

– Goods held in trust or representation:

The value of goods held in trust is recorded independently of the administration of each individual good. The value of goods held in representation is recorded based on the declared value of goods detailed in the representation contracts executed by the Institution.

45

– Assets in custody or under administration: This account includes the activity of third-party assets and securities received in custody or to be managed by the Institution.

– Collateral received: The balance is composed of all collateral received in sale and repurchase agreements in which the Institution is the buying party, as well as collateral received in a securities loan transaction where the Institution is the lender.

– Collateral received and sold or pledged in guarantee: The balance is composed of all collateral received in sale and repurchase agreements in which the Institution is the buying party that in turn is sold by the Institution as a selling party. This balance also includes the obligation of the borrower (or lender) to return to the lender (or borrower) the assets subject to the loan transaction carried out by the Institution.

– Uncollected, accrued interest derived from the overdue portfolio: Accrued interest is recorded in memoranda accounts when credits are transferred from the current portfolio to the overdue portfolio.

4. Funds available

As of December 31, 2015 and 2014, funds available were as follows:

2015 2014

Central Bank account, net (1) $ 36,738 $ 35,872

Time deposits (2) 98 99

“Call money” transactions granted (3) - 11,098

Cash 23,050 15,950

Foreign correspondents and Mexican banks, net 14,202 26,123

Foreign currency purchase-sale transactions (settled

in 24-48 hours) 25,750 12,056

Total funds available $ 99,838 $ 101,198

(1) As of December 31, 2015 and 2014, Central Bank account includes compulsory deposits made by the Institution of $35,872 for both years. As the term of this compulsory deposit is indefinite, the Central Bank will timely notify the date and procedure to withdraw the respective balances. Interest on the deposits is payable every 28 days at the rate established in the regulations issued by Central Bank. On June 9, 2014, through Circular 9/2014 issued by the Bank of Mexico (“Banxico”), the reference interest rate paid by monetary regulation deposits was changed to the one-day Interbank Interest Rate that the Banxico Board of Governance determined as a target rate for monetary policy purposes. As a result of the above, Banxico established new rules applicable to Monetary Regulation Deposits which include the following: a) Banxico terminated the monetary regulation deposits that credit institutions had established in

conformity with Circular 30/2008, issued by Banxico on July 9, 2008, and its respective amendment disseminated through Circular 36/2008 issued on August 1, 2008.

b) On June 19, 2014, at the opening of operations of the SIAC-Banxico, Banxico made the

necessary deposits in the sole account maintained by each credit institution. c) Similarly, it indicated the procedure that must be followed by the Institution, for the creation of

monetary regulation deposits regarding amounts, terms, yield and composition.

46

Furthermore, on June 27, 2014, through Circular 11/2014, Banxico increased the amount that credit

institutions are required to maintain in monetary regulation deposits on a proportional basis according

to figures reported for May 2014. The proportional amount calculated based on the amount of

traditional deposits relative to the Institution was $4,552.

(2) At December 31, 2015 and 2014, the Institution has time deposits with Mexican banks for the amount

of $98 and $99, respectively, for an 6 years period and with a 1.50% interest rate.

(3) “Call money” transactions represent interbank loan transactions agreed for periods equal to or less than

two business days. At December 31, 2015, the Institution has no “Call money” transactions grants. As

of December 31, 2014, these transactions were as follows:

2014

Counterparty Days Rate Balance

(Mexican pesos)

Domestic bank 2 3.0% $ 2,803

Domestic bank 2 3.0% 5,000

Domestic bank 2 2.9% 3,295

$ 11,098

Foreign currency receivable and deliverable on purchases and sales to be settled in 24 and 48 hours as of

December 31, 2015 and 2014, consists of the following:

2015

Foreign currency Mexican pesos

(Millions of US dollars)

Purchase of foreign exchange receivable in 24 and 48 hours 3,907 $ 67,390

Sale of foreign exchange to be settled in 24 and 48 hours (2,414) (41,640)

1,493 $ 25,750

2014

Foreign currency Mexican pesos


Purchase of foreign exchange receivable in 24 and 48 hours 1,927 $ 28,403

Sale of foreign exchange to be settled in 24 and 48 hours (1,109) (16,347)

818 $ 12,056

When the foreign currency deliverable or receivable on the sales and purchases are recorded under the

heading "Funds available", the settlement accounts of these transactions are recorded net in the consolidated

balance sheet under the headings “Other receivable, (net)” and “Creditors from settlement of transactions”.

47

5. Margin accounts As of December 31, 2015 and 2014 margin accounts for collateral submitted on derivative transactions in

organized markets are as follows:

Type of collateral 2015 2014

Mexder, Mercado Mexicano de Derivados, S.A. de C.V. Cash $ 1,465 $ 1,523 Chicago Mercantile Exchange Cash 115 893 Mexder, Mercado Mexicano de Derivados, S.A. de C.V. Actions 52 439 Foreign Financial Entities Cash 311 -

$ 1,943 $ 2,855

Security deposits cover positions operated on the Mexican Derivatives Market (“MEXDER”), the Futures

detailed in the Mexican Stock Exchange Index of Prices and Quotations (“IPC”), M20 Bond Rates, M30 Bond

Rates, the TIIE 28-day rate, Swaps, Dollar Currency (“DEUA”), IPC Futures Options, and similary in the

Chicago Mercantile Exchange (“CME”) in Futures issued by Standard & Poor´s 500 (“S&P 500”). Futures

related to the US Treasury Notes and Share options.

6. Investment in securities Trading securities- As of December 31, 2015 and 2014, trading securities were as follows:

2 0 1 5 2 0 1 4

Acquisition Accrued (Loss) Total Total

Debt instruments: Government securities-

Federal Treasury Securities (CETES) $ 27,219 $ - $ 1 $ 27,220 $ 8,718 United Mexican States Bonds (UMS) 518 16 (4) 530 565 Foreign Government Bonds - - - - 41 Development Bonds (BONDES) 99,079 95 56 99,230 32,315 M and M10 Mexican Government Bonds (M Bonds) 8,184 23 (5) 8,202 3,265 Mexican Bank Saving Protection Bonds (BPATS) 47,007 275 96 47,378 46,075 Federal Mexican Government Development Bonds in UDIS (UDIBONDS) 15,311 27 (20) 15,318 9,501

Private bank-issued securities- Promissory Notes - - - - 3,016 Unsecured Bonds 3,899 8 - 3,907 4,818 Certificates of Deposit (CEDES) 3,913 4 2 3,919 -

Private securities: Unsecured Bonds 768 3 (65) 706 5 Convertible debt-securities 238 2 7 247 916

Capital market instruments: Shares listed in stock exchanges 1,525 - 299 1,824 4,049 Investments in investment funds 1 - - 1 23

Value date transactions (not settled): Government securities -

Federal Treasury Securities (CETES) (1,075) - - (1,075) 1,639 M and M10 Mexican Government Bonds (M Bonds) 2,653 - (2) 2,651 (846) Federal Mexican Government Development Bonds in UDIS (UDIBONDS) (945) - 2 (943) 116 Mexican Bank Saving Protection Bonds (BPATS) (202) - - (202) -

Total trading securities $ 208,093 $ 453 $ 367 $ 208,913 $ 114,216

48

At December 31, 2015 and 2014, the investment in CETES, BONDES and UDIBONDS includes the amount of $24,413 and $14,432, respectively, which refers to the collateral provided for securities loan transactions in which the lender is Bank of México and other institutions, which was recorded under the heading “Trading securities”. At December 31, 2015 and 2014, the liability portion of $23,604 and $14,077, respectively, is recorded under the “Collateral sold or pledged as guarantee” consolidated balance sheet heading and composed as follows:

2 0 1 5 2 0 1 4

Loan Term

in Days Amount

Loan Term

in Days Amount

Asset guarantee:

Central Bank- CETES 4 $ 983 1 $ 7,789 BONDES 4 10,152 - UDIBONDS 4 12,786 1 6,173

23,921 13,962 Other institutions-

CETES - 14 470 Shares 14 492 - 492 470

$ 24,413 $ 14,432

Liability loan Central Bank-

CETES 4 $ 11,212 1 $ 9,659 M Bonds 4 10,934 1 2,273 UDIBONDS 4 1,329 1 1,763 23,475 13,695

Other institutions- Shares 19 129 14 382 129 382

$ 23,604 $ 14,077 The net amount of the premiums recognized in securities loan transactions in the consolidated statement of

income as part of the financial margin, is $(892) and $(456) during 2015 and 2014, respectively. As of December 31, 2015 and 2014, the trading securities position includes the following securities that are under sale and repurchase agreements, at fair value:

2015 2014

Government securities-

Federal Government Development Bonds (BONDES) $ 87,533 $ 31,864 M and M10 Bonds 8,202 3,266 Savings Protection Bonds (BPATS) 47,070 38,287 Treasury Bills (CETES) 25,888 8,230 United Mexican States Bonds (UMS) 241 295 Federal Government Development Bonds in UDIS (UDIBONDS) 2,532 3,327

Subtotal 171,466 85,269

Bank securities - Unsecured bonds 185 - Promissory Notes 3,504 34

Subtotal 3,689 34

Private securities - Unsecured bonds 503 -

Subtotal 503 -

Total $ 175,658 $ 85,303

This position is considered restricted within trading securities.

49

As of December 31, 2015, positions greater than 5% of the Institution’s net capital in debt securities with a sole

issuer (other than government securities) are as follows:

Issuer Date of maturity % Rate Restated value

PEMEX 11 8-Mar-16 3.57% $ 1 PEMEX 11-2 10-Apr-17 3.67% 40 PEMEX 12 23-Nov-17 3.71% 181 PEMEX 13 28-Feb-19 3.41% 192 PEMEX3 030519 3-May-19 8.00% 586 PEMEX 10-2 27-Jan-20 9.10% 1,384 PEMEC29 200723 23-Jul-20 3.50% 487 PEMEX 14 19-Nov-20 3.68% 30 PEMEX3 210121 21-Jan-21 5.50% 528 PEMEX 11-3 24-Nov-21 7.65% 1,006 PEMEX 020622 2-Jun-22 8.27% 932 PEMEX 240225 24-Feb-25 5.50% 304 PEMEX 14-2 12-Nov-26 7.47% 49 $ 5,720

As of December 31, 2014, positions greater than 5% of the Institution’s net capital in debt securities with a sole

issuer (other than government securities) are as follows:

Issuer Date of maturity % Rate Restated value

PEM0001 150716 16-Jul-15 9.91% $ 2,329 PEMEX 020622 2-Jun-22 8.25% 908 PEMEX 10-2 27-Jan-20 9.10% 1,415 PEMEX3 030519 3-May-19 8.00% 540 PEMEX3 210121 21-Jan-21 5.50% 482

$ 5,674

Available for sale securities - As of December 31, 2015 and 2014, are comprised as follows:

2015 2014

Acquisition Accrued Unrealized Gain

Cost Interest (Loss) Total Total

Debt instruments: Government securities-

Bonds M $ 52,576 $ 98 $ 46 $ 52,720 $ 30,985 United Mexican States Bonds(UMS) 3,981 74 (60) 3,995 1,775 Savings Protection Bonds (BPATS) 15,623 128 43 15,794 14,564 Federal Government Development Bonds in UDIS (UDIBONDES) 4,868 6 (237) 4,637 4,836 Foreign Government Bonds 31,034 415 (287) 31,162 24,693

Bank securities -

Senior Notes - - - - 501 Private bank securities -

Senior Notes 5,272 128 (183) 5,217 5,675

Capital market instruments- Shares 288 - (10) 278 241

Total available for sale securities $ 113,642 $ 849 $ (688) $ 113,803 $ 83,270

As of December 31, 2015 and 2014, Government securities comprised of M Bonds, BPAT’s, BONDES,

UDIBONDS, UMS and Private Unsecured bonds, in the amounts of $22,831 and $17,370, respectively, have

been repurchased, for which reason they are classified as a restricted position.

50

Securities held to maturity - As of December 31, 2015 and 2014 were as follows:

2015 2014


Special CETES - program of credit support and additional

benefits to the States and Municipalities $ 2,462 $ 2,389

Special CETES - support program for housing loan debtors 3,549 3,446

Total securities held to maturity 6,011 5,835

Less-

Reserve for Special CETES (373) (373)

Total securities held to maturity, net $ 5,638 $ 5,462

On March 30, 2000, the Board of Directors of Banca Serfin (an entity that was merged with the Institution)

approved the creation of a $1,887 million (face value) reserve with respect to the balance of long-term UDI-

denominated Special CETES (Reserve for Special CETES) (which mature between 2017 and 2022), recorded

in March 2000. This reserve was applied to retained earnings at that date as per the authorization granted by

the Commission through official letter No. 601-II-424, of April 10, 2000. According to this authorization,

Banca Serfin should proportionally release or cancel the reserves based on Banca Serfin’s collections through

the restructured UDIS portfolio trusts. At December 31, 2015 and 2014, this reserve amounts to $373.

As discussed in Note 10, the Institution executed an agreement for the early settlement of debtor support

programs as credit institutions considered the termination of these programs to be appropriate.

7. Sale and repurchase agreements

As of December 31, 2015 and 2014, when the Institution acts as purchaser:

2 0 1 5

Receivables under

Repurchase

Agreements

Collateral received and

sold for Repurchase

Agreements Position-net


Federal Government Development

Bonds (BONDES) $ 13,699 $ (12,924) $ 775


Bonds (CETES) 183 - 183

Savings Protection Bonds (BPATS) 7,748 (7,627) 121

M Bonds 1,448 (1,448) -

Subtotal 23,078 (21,999) 1,079

Bank securities-

Unsecured bonds 5,284 (156) 5,128

Subtotal 5,284 (156) 5,128

Private bank securities -

Unsecured bonds 74 (74) -

Subtotal 74 (74) -

Total $ 28,436 $ (22,229) $ 6,207

51

2 0 1 4

Receivables Under

Repurchase

Agreements

Collateral received and

sold for Repurchase

Agreements Position-net



Bonds (CETES) $ 629 $ (5) $ 624

Savings Protection Bonds (BPATS) 26,849 (26,766) 83

Subtotal 27,478 (26,771) 707

Bank securities-

Unsecured bonds 4,944 (451) 4,493

Subtotal 4,944 (451) 4,493

Private bank securities -

Unsecured bonds 80 (80) -

Subtotal 80 (80) -

Total $ 32,502 $ (27,302) $ 5,200 As of December 31, 2015 and 2014, premiums collected and paid on sale and repurchase agreements are

$1,828 and $3,026, respectively. At December 31, 2015 and 2014, repurchase agreements held by the Institution acting as repurchasee traded

over periods of up to 5 days. When the Institution acts as seller:

2015 2014

Government securities- Federal Government Development Bonds (BONDES) $ 85,969 $ 31,866 Treasury Bills (CETES) 25,733 8,215 M and M10 Bonds 26,379 19,144 Savings Protection Bonds (BPATS) 48,007 41,291 Federal Government Development Bonds in UDIS

(UDIBONDS) 2,533 3,327 United Mexican States Bonds (UMS) 291 295

Subtotal 188,912 104,138

Bank securities- Unsecured bonds 189 34 Certificates of Deposit (CEDES) 3,504 -

Subtotal 3,693 34 Private securities-

Unsecured bonds 2,498 1,051 Subtotal 2,498 1,051

Total $ 195,103 $ 105,223

As of December 31, 2015 and 2014, premiums collected and paid on sale and repurchase agreements are

$7,540 and $7,664, respectively. As of December 31, 2015 and 2014, the repurchase agreements entered into by the Institution, when acting as

the selling party, were agreed at an average term of seven days.

52

8. Derivatives

As of December 31, 2015 and 2014, the position in financial derivatives instruments is as follows:

2015 2014

Nominal Asset Nominal Asset

Asset Position Amount Position Amount Position

Futures-

Interest rate futures $ 724 $ 8 $ 20 $ -

Index futures 1,115 13 9,997 363

Forwards-

Foreign currency forwards 111,142 6,758 120,201 7,307

Interest rate forwards 2,000 6 - -

Index forwards 2,221 115 5,082 163

Options-

Foreign currency options 13,411 517 54,035 1,727

Interest rate options 110,054 1,129 164,775 2,317

Index options 31,558 1,022 168,415 1,009

Equity securities options - - 276 256

Swaps-

Interest rate swaps (IRS) 1,933,917 34,139 1,425,837 35,148

Cross currency swaps (CCS) 452,936 72,961 381,443 44,254

Total trading 2,659,078 116,668 2,330,081 92,544

Cash flow hedges-

Forwards-

Foreign currency forward 13,376 4,137 24,919 947

Swaps-

Interest rate swaps 2,050 22 2,050 13

Cross currency swap 28,331 7,961 32,917 3,748

Fair value hedges -

Swaps-

Interest rate swaps 733 1 4,998 32

Hedge derivatives 44,490 12,121 64,884 4,740

Total position $ 2,703,568 $ 128,789 $ 2,394,965 $ 97,284

53

2015 2014

Nominal Liability Nominal Liability

Liability Position Amount Position Amount Position

Futures-

Foreign currency futures $ 86 $ - $ 718 $ 11

Interest rate futures 101,915 343 177,784 550

Index futures 6,334 81 1,595 30

Equity securities forward - - 2 -

Forwards-

Foreign currency forwards 135,053 6,158 158,931 9,886

Index forwards 8,347 164 12,195 396

Interest rate forwards 20 - - -

Options-

Foreign currency options 16,749 545 57,485 1,481

Interest rate options 146,700 1,598 179,648 3,176

Index options 96,784 649 164,055 470

Equity securities options 500 30 2,682 115

Index warrants 304 299 536 543

Swaps-

Interest rate swaps (IRS) 2,064,378 34,286 1,574,784 33,671

Cross currency swaps (CCS) 439,278 80,648 379,509 44,450

Total trading 3,016,448 124,801 2,709,924 94,779

Cash flow hedges-

Forwards-

Foreign currency forward 29,931 5,660 28,134 1,954

Swaps-

Cross currency swaps 15,709 2,188 8,232 720

Fair value hedges-

Swaps-

Interest rate swap 5,545 78 2,565 52

Cross currency swap 7,531 1,630 8,499 1,663

Hedge derivatives 58,716 9,556 47,430 4,389

Total position $ 3,075,164 $ 134,357 $ 2,757,354 $ 99,168 The valuation effect of “Over the Counter” (OTC) derivative financial instruments held for trading purposes is recorded in the consolidated statements of income in the “Net gain on financial assets and liabilities” account. At December 31, 2015 and 2014, the recognized surplus value was $8,225 and $3,909, respectively.

54

Derivatives and the underlying assets are as follows:

Futures Forwards Options Swaps CCS Warrants

IPC Bonos-M Equity-AMXL CETES CDI GMX

MIP Equity-GFNORTE Equity-HSCE EURIBOR EURIBOR IPC

ES Equity-GFINBUR Equity-EUROSTOX LIBOR LIBOR SXX

DEUA Equity-KOF Equity-SXEE TIIE TIIE WMX

DC24 Equity-SPX Equity-SP USDFED NIKKEI

TE28 Equity-IPC Equity-NIKKEI

SWAP Equity-IBEX Equity-EWW

DC18 Fx-BRL Equity-GM

NV42 Fx-EUR Equity-WA

Fx-UDI Equity-CX

Fx-USD Equity-AX

Fx-GTQ Equity-IXE

Fx-JPY Equity-IBEX

Fx-CAD Equity-DJIA

Equity-SXDP

Equity-SX6E

Equity-GDAXI

Equity-FTSE100

Equity-GFINBUR

Equity-IBEX

Equity-ICA

Equity-IPC

Equity-WALMEX

Fx-EUR

Fx-USD

C&F-LIBOR

C&F-TIIE

As of December 31, 2015 and 2014, the guarantees and/or collateral received and delivered for the Over-the-

Counter (OTC) derivative financing transactions which were not transacted on recognized stock markets or

exchanges are as follows:

Delivered

Heading Type of Collateral 2015 2014

Other receivables (net)

Foreign Financial Entities Cash $ 22,578 $ 15,856

Mexican Financial Entities Cash 7,646 4,902

$ 30,224 $ 20,758

Trading securities

Mexican Financial Entity Government bonds $ 770 $ 453

$ 770 $ 453

$ 30,994 $ 21,211

55

As of December 31, 2015 and 2014, trading instruments received as surety and/or collateral for the derivative

financial transactions performed in OTC markets are restricted.

Received

Heading Type of Collateral 2015 2014

Sundry creditors and other accounts payable

Foreign Financial Entities Cash $ 9,704 $ 3,956

Mexican Financial Entities Cash 4,571 2,077

$ 14,275 $ 6,033

Memorandum accounts

Mexican Financial Entities Government bonds $ 7,276 $ 4,215

Foreign Financial Entities Government bonds - 668

$ 7,276 $ 4,883

In the case of OTC derivatives transactions that are not transacted on recognized stock markets or exchanges,

the Institution agrees to deliver and/or receive collateral to cover any exposure to market risk and the credit

risk of such transactions. Such collateral is contractually agreed to with each of the counterparties.

Currently, debt securities, are posted as collateral for transactions with domestic finance companies; cash

deposits and securities are used for transactions with foreign financial entities.

At December 31, 2015, the amount of noncash guarantees and/or collateral received cash that the Institution

delivered as collateral in repurchase transactions, was $1,019 and is recorded under “Collateral sold or

pledged”.

Management of derivative financial instrument usage policies

The policies of the Institution allow the use of derivatives for hedging and/or trading purposes.

The main objectives of these products are covering risks and maximizing profitability.

The instruments used are:

Forwards

Futures

Options

Swaps

Swaptions

According to the portfolios, implemented strategies can be of a hedge or trading nature.

Trading markets:

Listed

Over the Counter (OTC)

Trading markets are listed and OTC, in which eligible counterparties may be domestic and foreign with

internal authorizations.

The designation of calculation agents is determined in the legal documentation signed with counterparties.

The prices published by authorized price vendors are used to value derivative financial instruments.

56

The main terms or conditions of the contracts are based on the International Swap Dealers Association

(“ISDA”) or a local outline agreement.

The specific policies on margins, collateral and lines of credit are detailed in the internal manuals of the

Institution.

Impairment of derivative financial instruments -

As of December 31, 2015 and 2014, there is no indication of impairment in credit risk (counterparty) that

would require a modification in the book value of the financial assets related to the rights established in

derivative financial instruments.

Derivative financial instrument transactions for hedging purposes

As of December 31, 2015 and 2014, the Institution holds swap (Interest Rate and Cross Currency) hedging

transactions which are intended to hedge the financial margin with cash flow hedges and fair value hedges

throughout the hedge period.

Quantitative information

Fair value hedges

As of December 31, 2015 and 2014, the Institution holds hedging positions equivalents to a nominal amount

of $12,570 and $14,882, respectively, which are intended to hedge certain risks through cash flow and fair

value hedges throughout the hedge period.

During 2015, the Institution structured fair value hedges in their respective currency as follows:

Instrument Nominal Value

(In millions) Currency Instrument and Risk being Hedged

Swap IRS 3,339 Mexican pesos

Commercial loan portfolio - Interest

rate risk

Swap IRS 70 US dollars


rate risk

Swap CCS 29 US dollars

Private PEMEX - Interest rate risk and

exchange rate risk

Swap CCS 15 Euros


exchange rate risk During 2014, the Institution structured fair value hedges in their respective currency as follows:

Instrument

Nominal Value




rate risk



rate risk



exchange rate risk

57

As of December 31, 2015, the hedging derivative positions held as fair value hedges are as follows:





rate risk



rate risk



rate risk and exchange rate risk

Swap CCS 18 Euros

United Mexican States Bonds (UMS) -

Interest rate risk and exchange rate risk

Swap CCS 15 Euros


exchange rate risk

Swap CCS 30 Pounds


exchange rate risk



exchange rate risk

Swap CCS 825 UDIS

UDIBONDS - Interest rate risk and

Inflation risk

As of December 31, 2014, hedging derivative positions held as fair value hedges are as follows:





rate risk



rate risk



rate risk and exchange rate risk

Swap CCS 18 Euros

United Mexican States Bonds (UMS)-

Interest rate risk and exchange rate risk

Swap CCS 30 Pounds


exchange rate risk



exchange rate risk

Swap CCS 825 UDIS

UDIBONDS - Interest rate risk and

Inflation risk

58

Fair value hedges entered into by the Institution extend from 2016 to 2025.

The net accrued gain (loss) as of December 2015 and 2014, which represents the ineffectiveness of the fair

value hedges, is $135 and $(6), respectively.

For the years ended December 31, 2015 and 2014, the valuation effect of the hedged items for fair value

hedging purposes recorded in the consolidated statements of income in the account “Net gain on financial

assets and liabilities” is $148 and $65, respectively.

For the years ended December 31, 2015 and 2014, the valuation effect of derivative financial instruments

held for fair value hedging purposes recorded in the consolidated statements of income under “Net gain on

financial assets and liabilities” is $23 and $(71), respectively.

Cash flow hedges

During 2015, the Institution structured cash flow hedges for its commercial credit portfolio and debt issuance,

as follows:

Instrument

Nominal Value


Swap CCS 86 Euros

United Mexican States Bonds (UMS)

- Exchange rate risk

Swap CCS 10 British pounds



Swap CCS 332 Euros

Commercial loan portfolio -

Exchange rate risk



Exchange rate risk

During 2014, the Institution structured cash flow hedges on the commercial portfolio as follows:



Swap CCS 265 Euros


rate risk

Swap CCS 1,250 US dollars Senior Notes - Exchange rate risk

Forward Fx-USD 1,675 US dollars

Brazilian government treasury bills-

Exchange rate risk

Forward Fx-BRL 4,820 Brazilian real


Exchange rate risk

59

As of December 31, 2015, the positions in derivatives entered into for cash flow hedging purposes are as

follows:

Instrument

Face Value


Swap IRS 2,050 Mexican pesos BPAG’S Bonds - Interest rate risk

Swap CCS 332 Euros


Exchange rate risk



Exchange rate risk


Swap CCS 86 Euros



Swap CCS 10 Pounds





Exchange rate risk



Exchange rate risk

As of December 31, 2014, the positions in derivatives entered into for cash flow hedging purposes are as

follows:

Instrument

Face Value


Swap IRS 2,050 Mexican pesos BPAG’S Bonds - Interest rate risk

Swap CCS 265 Euros


Exchange rate risk



Exchange rate risk




Exchange rate risk



Exchange rate risk

60

The effective portion of cash flow hedges recognized in stockholders' equity as part of comprehensive income

is adjusted, in absolute terms, to the lower of the accrued gain or loss of the derivative financial instrument of

the hedge and the accrued change in fair value of the cash flows of the hedged item. At December 31, 2015,

as the cash flow hedges are 100% effective, the Institution did not recognize any amounts in the results of the

year related to the ineffective portion of cash flow hedges in accordance with the accounting criteria

established by the Commission. At December 31, 2014, cash flow hedge ineffectiveness of $6 was

recognized in the results of the year.

Changes in the effective portion of cash flow hedges, which is recognized in stockholders' equity as a part of

comprehensive income, is as follows:

2015 2014

Opening balance $ 266 $ 24

Entries of the period:

Amount recognized in comprehensive income within

stockholders' equity during the period (net of deferred

taxes) 537 336

Amount reclassified from stockholders’ equity to earnings

during the period (net of deferred taxes) 10 (94)

Closing balance $ 813 $ 266

The periods and amounts expected for cash flows and which affect results are as follows:

Less than 3

Months

More than 3

Months and

less than 1

Year

More than 1

Year and less

than 5 Years

More than 5

Years Total

Receivable cash flows $ 340 $ 1,247 $ 3,196 $ 619 $ 5,402

Payable cash flows $ (371) $ (778) $ (2,538) $ (515) $ (4,202)

The cash flow hedges currently contracted by the Institution are extend to 2017 for the Brazilian Government

Treasury Bills, 2018 for BPAG’s bonds classified as “available-for-sale”, 2022 for debt issuance, 2025 for

commercial credit denominated in foreign currency and until 2024 for UDIBONOS.

Cancelled cash flow hedges -

During the month of April 2015, the Institution decided to revoke the cash flow hedge designation of

derivative financial instruments (CCS) that covered the issuance of debt for the amount of $518 million U.S.

dollars (face value), thereby closing out the position with the advance expiration of the hedging derivative

financial instrument.

During June 2014, the Institution decided to revoke the designation of the cash flow hedge for IRS derivative

financial instruments which covered the monetary regulation deposit for the amount of $500 (notional value)

by closing the open position with new IRS swaps, which were recorded as trading derivatives.

At December 31, 2015 and 2014, the Institution maintains a balance in stockholders' equity under the heading

of “Result from the valuation of cash flow hedges instruments” of $71 and $61, respectively, which reflects

the residual accrued gain, net of deferred tax, generated by the effective portion of the hedge derivative which

was recognized in stockholders' equity as part of comprehensive income during the period in which these

hedges were in effect and effective. This balance is applied based on the originally forecast transaction period.

The application period expires between 2016 and 2022.

61

During 2015, valuation effects of $93 related to hedging swaps that were canceled during the year and in

previous years were recycled from stockholders’ equity to results. Of this amount, $14 refers to the valuation

effect of the swaps that hedged the issuance of debt, $32 refers to the valuation effect of the swaps that

hedged the Regulation Deposits, $46 refers to the valuation effect of swaps that hedged commercial loan

portfolio and $1 to the swaps that hedged the securitization certificate.

During 2014, $148 of the valuation of the hedge swaps which were canceled in previous years was recycled

from stockholders’ equity to results. Of this amount, $19 refers to the accrual of the valuation of the swaps

which covered BPAT’S Bonds and BONDES D, $122 to the accrual of the valuation of the swaps which

covered the monetary regulation deposit, $6 to the accrual of the valuation of the swaps which covered the

commercial portfolio and $1 to the accrual of the valuation of the swaps which covered the securitized

certificate.

Formal hedge documentation -

Once cash flow and fair value hedges are structured, the Institution prepares an individual file for each

instrument containing the following documentation:

– The strategy and objective of the entity’s risk management, as well as the justification to carry out the

hedging operation.

– The specific risk or risks to be hedged.

– Hedge structure identifying the derivative financial instruments contracted for hedging purposes and

the item generating the hedged risk.

– Definition of the elements composing the hedge, its objective and a reference to the effectiveness

valuation method.

– Contracts for the hedged item and hedging instrument, as well as confirmation from the counterparty.

– Periodic hedge effectiveness tests at the prospective level regarding its estimated future evolution and

at the retrospective level, concerning its past behavior. These tests are applied at least at the end of

each quarter, according to the valuation method defined when creating the hedge files.

9. Loan portfolio

The detail of the loans granted by economic sector as of December 31, 2015 and 2014 is as follows:

2015 2014

Federal Government loans $ 59,963 $ 56,006

Manufacturing industry 58,309 48,242

Retail 212,170 182,212

Other activities and services 78,921 83,875

Commercial 54,247 35,458

Communications and transportation 21,619 10,879

Construction 36,402 33,028

Tourism 12,436 6,309

Farming and cattle-raising 13,383 9,247

Mining 761 660

548,211 465,916

Interest collected in advance (382) (331)

Unaccrued financial burden from financial leasing transactions (84) (44)

$ 547,745 $ 465,541

62

During 2015, the average placement rate was 11.07% and 3.08% for loans denominated in Mexican pesos and

US dollars, respectively. During 2014, this rate was 11.84% and 3.61% for loans denominated in Mexican

pesos and Foreing currency, respectively (mainly US dollars and Euros).

At December 31, 2015 and 2014, the valuation of the portfolio hedged based on derivative financial

operations was $104 and $(44), respectively.

Loans to related parties - At December 31, 2015 and 2014, loans have been granted to related parties per

article 73 of the Law on Credit Institutions amounting to $72,396 and $73,238, respectively, which were

approved by the Board of Directors. As of December 31, 2015 and 2014 these amounts include a loan granted

to Santander Consumo, S.A. de C.V. SOFOM, E.R. (Santander Consumo) for $40,099 and $33,689,

respectively, and, at December 31, 2015 and 2014, a credit granted to Santander Hipotecario, S.A. de C.V.

SOFOM, E.R. (“Santander Hipotecario”) for the amount of $20,996 and $27,263, respectively. Furthermore, as

of December 31, 2015 and 2014, it includes a credit granted to Santander Vivienda, S.A. de C.V. SOFOM,

E.R. (“Santander Vivienda”) for $1,684 and $2,234, respectively. These credits were eliminated from the

balance sheet for consolidation purposes.

Policy and methods used to identify distressed commercial loans - Commercial loans are identified as

distressed in regard to the individual portfolio rating, by considering quantitative elements when they are

unsatisfactory and there are significant weaknesses in cash flow, liquidity, leverage, and/or profitability that

may jeopardize the borrower’s ability to continue as a going concern or when it has stopped operating. In

general, distressed loans refer to borrowers whose portfolio rating is “D” or “E”.

Policy and procedures to identify concentration of credit risk - Concentration of risk is an essential element

of risk management. The Institution continuously monitors the degree of concentration of credit risk

portfolios by economic group. This monitoring starts from the admission study stage with the application of a

questionnaire to the partners of the borrowing group to create a list of companies and assess the exposure of

the economic group by both credit and market risk.

Credit lines unused by customers - As of December 31, 2015 and 2014, unused authorized credit lines

amounted to $83,841 and $83,199, respectively.

Federal Government loans - As of December 31, 2015 and 2014, loans granted to Federal Government

agencies, including those of the support programs and agreements, were as follows:

2015 2014

Additional Benefit Program for:

Mortgage debtors $ - $ 109

Early termination of the housing support programs

30 34

Guarantees for Final Recovery Remnants of FOVI credits

Other loans granted to government agencies:

Unsecured loans 53,582 52,011

General loans 999 851

Restructured loans 3,506 1,503

Discounted portfolio loans 1,846 1,498

59,963 56,006

Advance interest payments (90) (79)

Total government loans $ 59,873 $ 55,927

63

Portfolio by loan type and currency - As of December 31, 2015 and 2014, the loans granted by type and

currency are as follows:

2 0 1 5

Valued amount

Loan type Mexican pesos US dollars UDIS

Euros Total

Performing loan portfolio:

Commercial loans-

Commercial or business

activity $ 188,299 $ 62,710 $ - $ 6,259 $ 257,268

Loans to financial entities 9,164 677 - - 9,841

Loans to government entities 43,602 16,268 - - 59,870

Consumer loans 88,029 - - - 88,029

Mortgage loans 109,842 941 3,706 - 114,489

438,936 80,596 3,706 6,259 529,497

Non-performing loan portfolio

Commercial loans-


activity 7,443 1,150 - - 8,593

Loans to government entities 3 - - - 3

Consumer loans 3,664 - - - 3,664

Mortgage loans 4,499 45 1,444 - 5,988

15,609 1,195 1,444 - 18,248

Total $ 454,545 $ 81,791 $ 5,150 $ 6,259 $ 547,745

2 0 1 4

Valued amount

Loan type Mexican pesos US dollars UDIS

Euros Total

Performing loan portfolio:

Commercial loans-


activity $ 154,142 $ 54,056 $ - $ 4,735 $ 212,933

Loans to financial entities 5,418 162 - - 5,580

Loans to government entities 38,504 17,421 - - 55,925

Consumer loans 72,459 - - - 72,459

Mortgage loans 95,819 875 4,495 - 101,189

366,342 72,514 4,495 4,735 448,086

Non-performing loan portfolio

Commercial loans-


activity 7,929 959 - 1 8,889

Loans to government entities 2 - - - 2

Consumer loans 3,165 - - - 3,165

Mortgage loans 3,748 81 1,570 - 5,399

14,844 1,040 1,570 1 17,455

Total $ 381,186 $ 73,554 $ 6,065 $ 4,736 $ 465,541

As of December 31, 2015 and 2014, the loan portfolio of the Institution is unrestricted.

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a. Below is a breakdown of commercial loans, identified as distressed or non-distressed and performing or

non-performing, as of December, 2015:

Non distressed Distressed

Portfolio Performing Non-performing Performing Non-performing Total

Business or commercial activity $ 255,836 $ 577 $ 1,432 $ 8,016 $ 265,861 Loans to financial entities 9,841 - - - 9,841 Loans to government entities 59,870 - - 3 59,873 $ 325,547 $ 577 $ 1,432 $ 8,019 $ 335,575

Below is a breakdown of commercial loans, identified as distressed or non-distressed and performing or

non-performing, as of December 31, 2014:

Non distressed Distressed

Portfolio Performing Non-performing Performing Non-performing Total

Business or commercial activity $ 211,079 $ 427 $ 1,854 $ 8,462 $ 221,822 Loans to financial entities 5,522 - 58 - 5,580 Loans to government entities 55,925 - - 2 55,927 $ 272,526 $ 427 $ 1,912 $ 8,464 $ 283,329

b. The restructured and renewed portfolio as of December 31, 2015 is as follows:

Restructured portfolio Performing Non-performing Total

Business or commercial activity $ 18,738 $ 2,764 $ 21,502 Loans to government entities 7,101 - 7,101 Consumer loans 1,043 928 1,971 Mortgage loans 2,088 1,539 3,627 28,970 $ 5,231 $ 34,201

The restructured and renewed portfolio as of December 31, 2014 is as follows:

Restructured portfolio Performing Non-performing Total

Business or commercial activity $ 5,467 $ 1,981 $ 7,448 Loans to financial entities - 89 89 Loans to government entities 3,583 - 3,583 Consumer loans 1,220 813 2,033 Mortgage loans 2,502 1,672 4,174 $ 12,772 $ 4,555 $ 17,327

c. As of December 31, 2015, the Institution had the following collateral, which was received after the

restructuring of certain loans:

Restructured Portfolio

Nature of collateral Performing Non-performing Total

Real property $ 40,050 $ 3,587 $ 43,637 Personal guarantees 368 202 570 Securities 6,167 3,342 9,509 Federal Government 6,454 - 6,454 Furniture 96 - 96 $ 53,135 $ 7,131 $ 60,266

65

As of December 31, 2014, the Institution had the following collateral, which was received after the

restructuring of certain loans:

Restructured Portfolio

Nature of Collateral Performing Non-performing Total

Real property $ 19,549 $ 3,939 $ 23,488 Personal guarantees 743 346 1,089 Securities 7,724 213 7,937 Federal Government 955 97 1,052 Furniture - 11 11 $ 28,971 $ 4,606 $ 33,577

d. As of December 31, 2015, aging of non-performing portfolio is as follows:

Period

Portfolio From 1 to 180 days From 181 to 365 days

From 365 days to 2

years Total

Business or commercial activity $ 2,747 $ 792 $ 5,054 $ 8,593

Loans to government entities - 2 1 3

Consumer loans 3,526 132 6 3,664

Mortgage loans 1,596 1,577 2,815 5,988

$ 7,869 $ 2,503 $ 7,876 $ 18,248

As of December 31, 2014 aging of non-performing portfolio is as follows:

Period

Portfolio From 1 to 180 days From 181 to 365 days

From 365 days to 2

years Total

Business or commercial activity $ 3,199 $ 642 $ 5,048 $ 8,889

Loans to government entities 2 - - 2

Consumer loans 3,148 17 - 3,165

Mortgage loans 1,825 1,627 1,947 5,399

$ 8,174 $ 2,286 $ 6,995 $ 17,455

e. For the year ended December 31, 2015 and 2014 interest generated on the loan portfolio of the Institution

is as follows:

Interest 2015 2014

Business or commercial activity $ 15,880 $ 13,957

Finance companies 253 175

Government entities 2,006 1,769

Consumer loans 9,860 7,859

Mortgage loans 11,032 9,720

39,031 33,480

Credit card portfolio 9,794 9,725

Total $ 48,825 $ 43,205

66

Acquisition of Scotiabank Inverlat’s portfolio -

On November 26, 2014, the Institution entered into an agreement to acquire a non-revolving consumer loans

portfolio from Scotiabank Inverlat (Scotiabank).

On March 17, 2015, after having obtained applicable regulatory authorizations, the Group signed a contract

with Scotiabank to acquire the non-revolving consumer loans portfolio. This acquisition was finalized on

April 2015. The acquired portfolio consists of 39,252 loans with a face value of 3,179 million pesos.

The fair value of the acquired loan portfolio was 3,002 million pesos. Loan secured by shares -

In June 2015, the Institution entered into three financial derivatives transactions known as Equity Swaps with

an entity holding shares in Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (“OMA”), using as

reference the shares of OMA (“OMA.B”) for the amount of $4,024. The respective maturity of these three

transactions was 30 days, 90 days and three years.

Furthermore, with the same holding company, the Institution entered into a private share purchase and sale

contract whereby it received OMA.B share certificates, thus obtaining 13.9% of the shares outstanding of

OMA. As the Institution did not intend to have significant influence in OMA, the equity and corporate rights

related to the shares of OMA were transferred through the Equity swaps agreed with such holding company.

As established in the Conceptual Framework of the NIF and in Accounting Criterion C-1, Recognition and

cancellation of financial assets issued by the Commission, the accounting recognition of the aforementioned

transaction is the same as if it were a credit guaranteed with shares, because it reflects the economic substance

of the transaction over its legal nature. Pursuant to the foregoing, the Institution adhered to that established in

Accounting Criterion B-6 for the respective accounting record.

Event subsequent to the close of the consolidated financial statements.

On January 8, 2016, at the request of the holding company with which the aforementioned transaction was

performed, the Institution early terminated the Equity swap which was in effect as of December 31, 2015, for

the amount of $2,265.

In addition to such early termination, the Institution eliminated equity held in OMA that was acquired through

the private share purchase and sale contract executed initially.

Assignment of commercial portfolio-

In February 2015, the Institution entered into an onerous assignment of loan portfolio contract with a related

party for four loans related to the commercial loan portfolio, whose book value at the date of assignment was

$3813. The amount received for the transaction was $3,859, generating a gain in results for the year of $46,

which was recorded in the consolidated statement of income under the heading “Other operating income”.

In the months of May and June 2015, the Institution entered into two portfolio assignment contracts related to

the commercial loan portfolio, whose book value at the date of assignment was $2447. The amount received

for the transaction was $2,453, generating a gain in results of the year of $6, which was recorded in the

consolidated statement of income under the heading “Other operating income”.

Assignment of payroll portfolio -

In February 2014, the Institution executed a contract of onerous assignment of loan portfolio with a financial

institution for 19,689 payroll loans with a carrying amount at the date of sale of $532. The amount received

for the sale was $417, generating a loss of $121 in results of the year, which was recorded in the consolidated

statement of income under the heading “Other operating income”.

67

Sale of written-off portfolio -

During the months of October and December of 2015, the Institution sold written-off portfolio to an entity in the financial services sector. The face value of such loans was $4,642. The sale price of such loan portfolio was $63, resulting in a gain of $63 in the statement of income, which was recognized under “Other operating income”.

In December 2014, the Institution sold written off credit portfolio to a related party; the face value of these credits was $829. The selling price of such portfolio was $226, generating income under the heading “Other revenues from the operation” of $226. An independent external advisor determined that this price reflected market prices.

Mexican real estate sector -

During April and June of 2014, two of the three principal Mexican real estate companies with loans from the Institution were declared bankrupt after meeting the conditions contained in the Commercial Bankruptcy Law to be considered insolvent. In June and November of 2015, Mexican civil authorities declared the conclusion of the bankruptcy for these two Mexican real estate companies.

At the beginning of December 2014, the remaining real estate Company also petitioned the Mexican authorities for initiation of a pre-arranged bankruptcy. In January 2015, this real estate company was declared bankrupt, effective December 31, 2015, in accordance with the Commercial Bankruptcy Law.

10. Early elimination of the Borrower Support Programs

At December 31, 2013, all the loans restructured in UDIS and which were recorded in the respective trusts reached maturity. The Institution’s management is currently in the process of liquidating these trusts.

The contract to early eliminate the borrower support programs (the “Contract”) was signed on July 15, 2010, whereby the banks deemed it advisable to early terminate the following programs, which were created between 1995 and 1998 derived from the debt restructurings, as follows:

a. Housing Loan Borrower Support Program (“Support Program”); b. Support Program for the Building of Housing in the process of construction in their personal loan stage

(Support Program); and the c. Agreement of Benefits for Housing Loan Borrowers (“Discount Program”)

The banks reached agreement with the Mexican Treasury and the Commission. This agreement was handled through the Mexican Bankers' Association (“ABM”) and establishes that to ensure the proper application of the early termination agreement scheme, the banks will be subject to the supervision and oversight of the Commission, and will adhere to the observations and corrections indicated by the Commission, for which purpose they must provide any and all information requested from them in relation to the performance of the agreement.

The early termination scheme covered the loans restructured or granted in UDIS under the Borrower Support Programs, the loans denominated in Mexican pesos which are entitled to receive the Discount Program benefits. Additionally, it covers loans which, as of December 31, 2010 (cutoff date) are current, as well as past-due loans which as of the same date were restructured, as well as those loans which in order to be current received a reduction, discount or rebate, regardless of the amount, provided that there is evidence of payment

compliance. On July 26, 2010, the Commission published, in the Federal Official Gazette, the "General provisions applicable to Credit Institutions in the early termination of mortgage programs”, which establish the rules for accounting, reporting and audit requirements for the operation of the Contract, as well as the special rules for the proper restructuring process of the loans which can apply the benefits of the Mortgage Programs and the

Agreement.

As established above, the Institution complied with the Contract, which went into effect on July 15, 2010.

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Each monthly installment will include a financial cost (the “Annual Charges”) from the day immediately

following the Cutoff Date until the close of the month immediately before the payment date, using for January

2011, the rate resulting from the arithmetical average of the annual rates of return calculated on the discount

rate of the 91 day CETES issued in December 2010, and for the subsequent months the future interest rates of

the 91 day CETES of the immediately preceding month, published by the company Proveedor Integral de

Precios, S.A. (price vendor), on the business day immediately following that of the Cutoff Date, or as the case

may be, that of the closest previous month contained in such publication, carried to a 28 day term yield curve,

by dividing the resulting rate by 360 and multiplying the result so obtained by the number of days elapsed

during the period in which it is accrued, and capitalized monthly.

These payment obligations will be subject to the other provisions contained in the Agreement and the

Settlement Agreement to Early Eliminate the Support Program for Housing Loan Debtors, the Support

Program for the Building of Homes in Construction in Their Individualized Credit Stage, and the Benefits

Agreement for Housing Loan Debtors executed on September 6, 2011 (the “Settlement Agreement”).

In June 2011 and the start of the terms established by the Agreement, Management determined the correct

application and execution of the Agreement to ensure the early settlement of Housing Loan Debtor Support

Programs.

After determining payable annuities, on September 29, the 2011, management calculated the adjusted amount

of the first annuity payable on December 1, 2011 by considering that the default index is inapplicable to this

initial year. Under the Agreement, if the portfolio exceeds this default index, the Institution loses the Support

Benefit payable by the Federal Government.

The payment obligations of the Federal Government were fulfilled through annual repayments for a period of

five years from December 1, 2011 until June 1, 2015; consequently, as of December 31, 2015 there are no

repayments pending. The payment of the adjusted amount of the annual payments was made as follows:

Annual payment Payment date Amount

First December 1, 2011 $ 127

Second June 1, 2012 118

Third June 3, 2013 121

Fourth June 2, 2014 115

Fifth June 1, 2015 110

$ 591

The maximum amount that the Institution will have to absorb from loan borrowers which, given their

characteristics, were not included in the Early Settlement Scheme under the Agreement, if these loans become

current and whereby borrowers would be entitled to receive Discount Program benefits, is $32.

The remaining balance and maturity dates of these special CETES which, as they were not repurchased by the

Federal Government, are maintained by the Institution in its consolidated balance sheet as of December 31,

2015 and 2014, are as follows:

2015 2014

Issuance Trust

Non-

securities

Maturity

Date

Price in

Mexican pesos

Millions of

Mexican

pesos

Price in

Mexican pesos

Millions of

Mexican

pesos

B4-170713 421-5 9,155,840 13-jul-2017 $ 94.06726 $ 861 $ 91.32700 $ 836

B4-170720 424-6 86,723 20-jul-2017 $ 94.06726 8 $ 91.32700 8

B4-220707 422-9 12,762,386 07-jul-2022 $ 94.06726 1,201 $ 91.32700 1,166

B4-270701 423-2 15,292,752 01-jul-2027 $ 94.06726 1,439 $ 91.32700 1,397

B4-220804 431-2 440,294 04-ago-2022 $ 86.12619 38 $ 83.61725 37

BC-220804 431-2 71,442 04-ago-2022 $ 30.21741 2 $ 29.45004 2

$ 3,549 $ 3,446

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11. Allowance for loan losses On August 27, 2015, the Commission issued a Resolution amending the Provisions whereby it made certain modifications to the methodology applicable to the classification of consumer loan portfolio under the expected loss model in order to recognize in such classification, certain guarantees in the aforementioned process and better provision the allowances for loan losses, bearing in mind that such guarantees are already recognized in the commercial loans made. As already noted, the Commission considered it advisable to recognize the guarantee schemes known as pari passu or first losses for the commercial portfolio in order to eliminate regulatory inconsistencies. With this same Resolution, the Commission clarifies the term during which credit institutions may continue using the methodology for the calculation of the allowance for losses in relation to the loans made to borrowers declared bankrupt with a previous restructuring plan. This Resolution establishes that once an agreement is adopted between the borrower and the recognized creditors, or the bankruptcy of the borrower is determined in accordance with the Commercial Bankruptcy Law, such methodology can no longer be applied. It also indicates that authorization may be requested from the Commission to continue using the methodology for the calculation of the allowance for loan losses expected from credit risk, in relation to the loans granted to borrowers declared bankrupt with a previous restructuring plan for a term which cannot exceed six months computed as of the date of adoption of the agreement. On March 26, 2014, the Commission issued a Ruling which modifies the provisions, adjusting the methodology applicable to the classification of commercial loan portfolio for loans granted in conformity with Sections II and III of Article 224 of the Commercial Bankruptcy Law, in order to make it consistent with the amendments made to such statute on January 10, 2014. This methodology mainly includes the consideration of collateral created under the terms of Article 75 of the Commercial Bankruptcy Law for the determination of the Severity of the Loss, by applying certain adjustment factors or discount percentages for each type of admissible security interest in personal or real property. On June 24, 2013, the Commission modified the methodology applicable to the classification of the commercial loan portfolio to change the model for creating allowance for loan losses from the incurred loss model to an expected loss model where losses for the following 12 months are estimated based on current credit information. Such modification entered into effect on the day following its publication. The Commission stipulated the recognition of the initial financial effect derived from the application of the classification methodology for the commercial credit portfolio in stockholders’ equity at the latest by December 31, 2013, under the heading “Result from previous years”. The Commission established two deadlines for the implementation of this change in methodology: December 31, 2013 to recognize the initial financial effect of the commercial loan portfolio and June 30, 2014 to recognize the initial financial effect for the loan portfolio to financial entities. In accordance with the deadline established by the Commission, the Institution recognized the initial financial effect for the loan portfolio to financial entities and the commercial loan portfolio as of June 30, 2014. As of June 30, 2014, the cumulative financial effect derived from the application of the change in the rating methodology of the loan portfolio to financial entities and commercial loan portfolio originated an increased in the allowance for loan losses in the amount of $83, which were reported in the consolidated balance sheet under the line item "Allowance for loan losses" with corresponding debit in Stockholders' under the line item “Retained earnings” by this same amount. In addition, and in accordance with provisions of MFRS D-4, Income Taxes, the Institution recognized the deferred tax resulting from the initial cumulative financial effect derived from the change in the rating methodology of the loan portfolio to financial entities and the commercial loan portfolio. This was accounted for as an increase in the amount of $25, in the line item “Deferred taxes and deferred profit sharing (net)” within the unaudited condensed consolidated balance sheet asset side with its corresponding increase in the “Retained earnings” line item within the Stockholders' equity. The initial cumulative financial effect recognized in Stockholders equity under “Retained earnings” line item derived from the application of the change in rating methodology of the commercial loan portfolio amounted to $58, net of the related deferred income tax.

70

As of December 31, 2015 and 2014, the allowance for loan losses was $19,743 and $16,951, respectively,

assigned as follows:

Performing Non-performing Assigned

2015 Portfolio Portfolio Allowance

Commercial and financial entities

portfolio $ 3,222 $ 4,831 $ 8,053

Mortgage loans 664 1,373 2,037

Credit cards and consumer loans 7,387 2,266 9,653

Total Portfolio $ 11,273 $ 8,470 $ 19,743

Performing Non-performing Assigned

2014 Portfolio Portfolio Allowance

Commercial and financial entities

portfolio $ 3,173 $ 4,094 $ 7,267

Mortgage loans 628 1,036 1,664

Credit cards and consumer loans 6,000 2,020 8,020

Total Portfolio $ 9,801 $ 7,150 $ 16,951

As of December 31, 2015 and 2014, the Institution maintained an allowance for loan losses equivalent to 108%

and 97% of the non-performing portfolio, respectively.

The allowance for loan losses resulting from the loan portfolio classification as of December 31, 2015 and 2014,

recorded in the same year, together with the additional allowances required and those established for the UDIS

trusts, were classified as follows:

2 0 1 5 2 0 1 4

Classification Classification

of the Portfolio Amount of the Portfolio Amount

by Risk of Allowance by Risk of Allowance

Degree of Credit Risk Degree Recorded Degree Recorded

A $ 455,844 $ 2,572 $ 401,672 $ 2,986

B 86,212 3,895 56,467 2,647

C 24,403 2,467 18,231 2,002

D 14,227 5,124 15,123 6,157

E 8,399 5,641 5,202 3,052

Base classification portfolio 589,085 19,699 496,695 16,844

Less-

Guarantees and credit openings (40,874) - (30,779) -

Un-accrued financial burden (84) - (44) -

Interest collected in advance on factoring operations (382) - (331) -

Loan portfolio, net $ 547,745 19,699 $ 465,541 16,844

Additional reserves 44 107

Total allowance for loan losses

$ 19,743 $ 16,951

The Institution maintains additional reserves, which include the cost of loan portfolio support programs.

The portfolio classified with “D” and “E” risk is identified as distressed portfolio.

71

Below is the activity of the allowances for loan losses for the years ended December 31, 2015 and 2014:

2015 2014

Opening balances $ 16,951 $ 16,222 Provisions (applications) with a charge (credit) to-

Portfolio reserve of Santander Hipotecario based on its fair value

Earnings 17,244 14,289 Charge to capital due to methodology change (Consumer,

Mortgage, States and Municipalities) - 83 Recoveries credited in results from retained earnings (14) (20) Applications and reductions (198) (129) Support program (14,430) (13,604) Other 190 110

Closing balances $ 19,743 $ 16,951

12. Other receivables, (net)

As of December 31, 2015 and 2014, are comprised of:

2015 2014

Receivables arising from liquidation of transactions $ 20,312 $ 15,015 Collateral given in cash for transactions not performed on

recognized stock markets or exchanges (“OTC”) 30,224 20,758 Other debtors 5,418 5,584 Employee loans 3,745 3,317 Recoverable taxes 1,879 7,053 61,578 51,727 Allowance for doubtful accounts (546) (514)

Total $ 61,032 $ 51,213

As of December 31, 2015 and 2014, transaction liquidation debtors are as follows:

2015 2014

Debt instruments $ 9,635 $ 10,610 Shares 15 435 Foreign currency 5,465 2,926 Others 5,197 1,044

Total $ 20,312 $ 15,015

13. Foreclosed assets, (net)

As of December 31, 2015 and 2014 were as follows:

2015 2014

Foreclosed properties $ 1,143 $ 946 Promissory properties 3 4 1,146 950 Less- Valuation allowance on foreclosed assets (589) (592)

Total $ 557 $ 358

72

Changes in the valuation allowance on foreclosed assets are summarized below (at nominal value) for the

years ended December 31, 2015 and 2014:

2015 2014

Opening balance $ 592 $ 1,141

Results 117 31 Release of reserves for sale of foreclosed assets (120) (580)

Closing balance $ 589 $ 592

During December 2013, the Institution signed an agreement with a financial institution for the sale of 1,309

foreclosed assets. The transaction concluded on January 31, 2014 at a selling price of $282, generating pre-tax

gain of $149, which was recorded in the consolidated statement of income under “Other operating income”.

14. Property, furniture and equipment, (net)

As of December 31, 2015 and 2014 were as follows:

Acquisition Cost

Accumulated

Depreciation Net Book Value

Properties for office purposes $ 1,075 $ (384) $ 691 Fixtures 6,467 (2,937) 3,530 Computer equipment 481 (319) 162 Office furniture 1,328 (753) 575 Communication equipment 319 (134) 185 Peripheral computer equipment 769 (467) 302 Vehicles 175 (89) 86 Other equipment 17 (1) 16 Balance at December 31, 2015 $ 10,631 $ (5,084) $ 5,547 Properties for office purposes $ 1,075 $ (372) $ 703 Fixtures 5,826 (2,400) 3,426 Computer equipment 431 (278) 153 Office furniture 1,192 (659) 533 Communication equipment 216 (96) 120 Peripheral computer equipment 587 (372) 215 Vehicles 178 (86) 92 Other equipment 18 (1) 17 Balance at December 31, 2014 $ 9,523 $ (4,264) $ 5,259

The entries in property, furniture, and equipment are as follows:

Acquisition cost:

Balance at January 1, 2014 $ 8,484 Additions 1,279 Disposals (240) Balance at December 31, 2014 9,523 Additions 1,190 Disposals (82) Balance at December 31, 2015 $ 10,631

73

Accumulated depreciation:

Balance at January 1, 2014 $ (3,720)

Additions (784)

Disposals 240

Balance at December 31, 2014 (4,264)

Additions (900)

Disposals 80

Balance at December 31, 2015 $ (5,084)

Balance at December 31, 2015 $ 5,547

Balance at December 31, 2014 $ 5,259 The annual depreciation and amortization rates were as follows:

Percentage

Properties for office purposes 2% to 5%

Office furniture 10%

Computer equipment 25%

Peripheral computer equipment 25%

Vehicles 20%

Communication equipment 20%

Fixtures 10%

Other 10% and 20% Fibra Uno

During the second quarter of 2012 the Institution executed a contract with Fibra Uno, S.A. de C.V.

(hereinafter “Fibra Uno”) for the sale of 220 properties (branches, offices and parking lots), together with the

subsequent lease of this property for a 20-year period. This transaction was subject to the approval of the

respective regulatory entities, which was granted in May 2012.

The lease contract is considered as an operating lease which cannot be canceled and includes a renewal option

for up to four consecutive five-year periods based on market rates which will be determined at each renewal

date. The lease contract includes rental adjustments based on the INPC, but does not contain contingent rental

payment clauses based on volumes or purchase options. Likewise, it does not restrict the capacity of the

Institution to pay dividends, contract debt or execute additional rental agreements.

According to the operating lease contract, at December 31, 2015, minimum future payments are as follows:

Lease Fibra Uno Others Total

2016 $ 266 $ 162 $ 428

2017 276 463 739

2018 276 620 896

2019 276 354 630

2020 276 403 679

2021 and thereafter 3,125 1,909 5,034

Minimum future payments $ 4,495 $ 3,911 $ 8,406

74

15. Long-term investment in shares

As of December 31, 2015 and 2014, were as follows:

Equity

Percentage

Institution in 2014 2015 2014

Other investments Sundry $ 182 $ 152

Total $ 182 $ 152

As of December 31, 2015 and 2014, share on profit of no consolidated subsidiaries and associates is as

follows:

Institution 2015 2014

Other investments $ 81 $ 79

$ 81 $ 79

16. Other assets, (net)

As of December 31, 2015 and 2014, were as follows:

2015 2014

Intangibles:

Goodwill (1) $ 1,735 $ 1,735

Software and technological developments 6,248 4,487

7,983 6,222

Less - Accumulated amortization of other assets (3,105) (2,142)

4,878 4,080

Other assets

Prepaid expenses 450 498

Security deposits 43 39

493 537

$ 5,371 $ 4,617

Software is amortized over a three-year term from the date acquired. Licenses are amortized over a 3.3-year

term from their date of use. Amortization for intangibles is recorded in the consolidated statements of income

under the heading “Administration and promotional expenses”.

(1) Includes goodwill arising from the acquisition of Santander Vivienda from ING Group for $146 and

goodwill arising from the acquisition of the mortgage business acquired from GE in the amount of

$1,589. As of December 31, 2015 and 2014, both amounts of goodwill do not show indicators of

impairment.

75

Software and technological developments

The movements in software and internally developed information technology systems are as follows:

Acquisition cost:

Balance at January 1,2014 $ 5,405 Additions 1,226 Disposals (2,144) Balance at December 31, 2014 4,487 Additions 1,761 Disposals - Balance at December 31, 2015 $ 6,248

Accumulated amortization: Balance at January 1, 2014 $ (3,389) Additions (897) Disposals 2,144 Balance at December 31, 2014 (2,142) Additions (963) Disposals - Balance at December 31, 2015 $ (3,105)

Net balance at December 31, 2015 $ 3,143 Net balance at December 31, 2014 $ 2,345

17. Foreign currency position

At December 31, 2015 and 2014, foreign currency assets and liabilities of the Institution were as follows:

Millions of US dollars

2015 2014

Funds available 3,321 2,516 Margin accounts 25 61 Investments in securities 2,235 2,025 Derivatives (net) (2,707) (2,962) Loan portfolio 5,018 5,301 Valuation adjustment for hedged financial assets 3 (6) Other receivables (net) 316 800 Deposits (4,192) (4,171) Interbank and other loans (1,741) (1,732) Sundry creditors and other payables (762) (451) Sale and repurchase agreements (net) (17) (123) Outstanding subordinated liabilities (1,324) (1,324)

Net liability position 175 (66) Mexican peso equivalent $ 3,019 $ (973)

As of December 31, 2015 and 2014, the “Fix” (48-hour) exchange rate used was $17.2487 and $14.7414 per

US dollar, respectively.

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As of February 22, 2016, the unaudited foreign currency position (unaudited) was similar to that in effect at

year-end, and the “Fix” exchange rate was $18.0568 per US dollar. The Central Bank sets the ceilings for foreign currency liabilities and the liquidity ratio that the Institution

obtains directly or through its foreign agencies, branches or affiliates, which must be determined daily for such

liabilities to enable the Institution to structure their contingency plans and promote longer term funding within

a reasonable time frame. The Institution performs a large number of foreign currency transactions. Given that the parities of other

currencies against the Mexican peso are linked to the US dollar, the overall foreign currency position is

consolidated into US dollars at each month-end closing.

18. Deposits The instruments used by the Institution to obtain funding from their customers are recorded in this line item and

consist of the following: Demand and time deposits and bank bonds - This caption represents customers’ cash deposits. The 2015 and 2014 year-end funding rates were as follows:

2 0 1 5 2 0 1 4

Year-end Rates Year-end Rates

Mexican Foreign Mexican Foreign

Accounts pesos Currency pesos Currency

Demand deposits-

Checking accounts From 0.39% to 3.56% From 0.10% to 0.41% From 0% to 3.35% -

Time deposits -

Fixed-term deposits From 0.15% to 8.43% From 0.10% to 0.60% From 0.15% to 2.74% From 0.10% to 0.35%

Deposits certificates (money market) From 0.15% to 4.00% - From 0.6% to 1.76% -

As of December 31, 2015 and 2014 time deposits consisted of the following:

2015 2014

Notes with interest payable at maturity $ 134,047 $ 137,016

Fixed-term deposits 22,345 9,816

Foreign currency time deposits 12,514 18,967

$ 168,906 $ 165,799

As of December 31, 2015, maturities of promissory notes with interest payable upon maturity denominated in

Mexican pesos fluctuate between 1 and 371 days and the annual closing rates were within 0.15% to 8.43%.

19. Issuance program

Issuance program On April 19, 2007, the Board of Directors of the Institution authorized an issuance program for up to US $4,000

million or its Mexican pesos equivalent. In December 2007, the Commission authorized the issuance of 42,000

million “Bank unsecured bonds”, “Bank Fixed-Term Deposit Certificates”, “Promissory Notes with Returns

Payable at Maturity” and “Structured Bank Bonds” denominated in Mexican pesos, UDIS, Euros or US dollars

for up to 30 years (the General Program). The Board of Directors authorized this program during its August 2008

meeting. The Commission acknowledged the Institution's program to issue “Private Bank Bonds” (unsecured

private placement bonds) for the amount of $10,000 million. In October 2010, the Board of Directors renewed its

April 2007 authorization of the issuance program for amount of up to US $4,000 million.

77

In October 2011, the Board of Directors of the Institution authorized an increase in the amount of the issue

program for up to US $6,500 million.

In October 2013, in relation to the increase authorized in October 2011, the Board of Directors of the

Institution ratified the amount of the issue program, making the clarification that the maximum term of the

issues should be 15 years.

As part of this authorization there is a debt program in place to issue “Bank securitized certificates” and

“Term deposit certificates” for up to $55 billion, which was authorized by the Commission in March 2012,

and the issuance of “Bank Bonds” for up to $20 billion, authorized by the Commission in April 2013.

At December 31, 2014 and 2013, the Institution has placed and settled securitization certificates, bank

bonds and senior notes with a market value of $40,123 and $27,028, respectively, which are comprised

as follows:

Instrument 2015 2014 Period Rate

Stock Certificates $ 1,700 $ 1,700 9-Mar-2021 8.91% Fixed rate Stock Certificates 2,800 2,800 21-Sep-2016 Variable Rate (TIIE + 50 basis points) Stock Certificates 1,300 1,300 21-Sep-2016 Variable Rate (TIIE + 50 basis points) Stock Certificates 3,000 - 06-Dec-2018 Variable Rate (TIIE + 18 basis points) Stock Certificates 988 986 23-Nov-2017 9.05% Fixed rate Structured Bank Bonds - 58 26-Aug-2015 Variable Rate (TIIE) Structured Bank Bonds - 20 15-Oct-2015 Index (IBEX35) Structured Bank Bonds - 5 04-Aug-2015 Variable Rate (TIIE) Structured Bank Bonds - 8 18-Aug-2015 Variable Rate (TIIE) Structured Bank Bonds - 11 20-Jan-2015 Index (Euro STOXX 50) Structured Bank Bonds 669 1,491 02-Mar-2017 Index (Euro STOXX 50) Structured Bank Bonds 40 87 13-Mar-2017 Index (Euro STOXX 50) Structured Bank Bonds 50 50 16-Mar-2017 Index (Euro STOXX 50) Structured Bank Bonds 12 12 24-Mar-2017 Index (Euro STOXX 50) Structured Bank Bonds 12 12 06-Apr-2017 Index (Euro STOXX 50) Structured Bank Bonds 58 58 07-Apr-2016 Index (Euro SX7E) Structured Bank Bonds - 10 26-May-2016 Index (Euro SX7E) Structured Bank Bonds - 20 08-Jun-2016 Index (Euro SX7E) Structured Bank Bonds - 11 18-Jun-2015 Index (Euro SX7E) Structured Bank Bonds - 23 19-Jun-2015 Index (NIKKEI 225) Structured Bank Bonds - 18 24-Jun-2015 Index (Euro SX7E) Structured Bank Bonds 824 846 29-Jun-2017 Index (IBEX35) Structured Bank Bonds - 100 08-Jan-2015 Exchange rate Structured Bank Bonds 554 614 03-Aug-2017 Index (Euro SX5E) Structured Bank Bonds 238 240 24-Aug-2016 Index (HSCEI y S&P 500) Structured Bank Bonds 493 561 06-Sep-2017 Index (Euro SX5E)

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Structured Bank Bonds 385 385 08-Sep-2017 Index (Euro SX7E) Structured Bank Bonds - 16 09-Sep-2015 Index (Euro SX5E) Structured Bank Bonds - 20 06-Jan-2015 Exchange rate Structured Bank Bonds - 18 13-Jan-2015 Exchange rate Structured Bank Bonds - 11 30-Jan-2015 Exchange rate Structured Bank Bonds - 28 05-Jan-2015 Exchange rate Structured Bank Bonds - 24 17-Feb-2015 Exchange rate Structured Bank Bonds 23 34 14-Oct-2016 Index (Hang Seng) Structured Bank Bonds 107 107 06-Nov-2017 Index (S&P 500) Structured Bank Bonds 276 276 17-Nov-2016 Index (IBEX35) Structured Bank Bonds 600 600 04-Jan-2018 Index (EURO STOXX Oil & Gas) Structured Bank Bonds 13 13 04-Jan-2018 Index (EURO STOXX Oil & Gas) Structured Bank Bonds 347 - 19-Feb-2018 Index (IXE) Structured Bank Bonds 601 - 06-Mar-2017

Index (HSCEI, S&P 500, SX5E y NIKKEI 225)

Structured Bank Bonds 996 - 03-Apr-2018 Index (EURO STOXX Oil & Gas) Structured Bank Bonds 1,127 - 02-Mar-2018 Index (FSTE 100) Structured Bank Bonds 16 - 19-Apr-2016 Index (S&P 500) Structured Bank Bonds 25 - 09-May-2017 Index (Euro SX5E) Structured Bank Bonds 150 - 16-May-2018 Index (Euro SX5E) Structured Bank Bonds 25 - 25-May-2017 Index (IBEX35) Structured Bank Bonds 130 - 31-May-2018 Index (Euro SX5E) Structured Bank Bonds 10 - 29-Jun-2016 Index (NIKKEI 225) Structured Bank Bonds 485 - 27-Jun-2018 2% Fixed Rate Structured Bank Bonds 1,080 - 29-Jun-2018 Index (Euro SX6E) Structured Bank Bonds 150 - 29-Jun-2018 Index (Euro SX6E) Structured Bank Bonds 90 - 29-Jun-2018 Index (Euro SX6E) Structured Bank Bonds 10 - 29-Jun-2018 Index (Euro SX6E) Structured Bank Bonds 150 - 07-Jan-2016 Exchange rate Structured Bank Bonds 30 - 01-Jul-2016 Variable Rate (TIIE) Structured Bank Bonds 125 - 12-Jul-2018 Index (Euro SX6E) Structured Bank Bonds 150 - 14-Jul-2016 Variable Rate (TIIE)

79


Structured Bank Bonds 10 - 25-Jul-2016 Variable Rate (TIIE) Structured Bank Bonds 10 - 02-Aug-2016 Index (DAX) Structured Bank Bonds 120 - 10-Aug-2017 Index (IPC) Structured Bank Bonds 185 - 11-Aug-2016 Variable Rate (TIIE) Structured Bank Bonds 150 - 30-Aug-2017 Index (IPC) Structured Bank Bonds 125 - 30-Augo-2018 Index (Euro STOXX 50) Structured Bank Bonds 150 - 14-Sep-2017 Index (IPC) Structured Bank Bonds 50 - 14-Sep-2017 Index (IPC) Structured Bank Bonds 100 - 20-Sep-2018 Index (Euro STOXX 50) Structured Bank Bonds 125 - 27-Sep-2018 Index (Euro STOXX 50) Structured Bank Bonds 150 - 19-Oct-2018 Index (INDU) Structured Bank Bonds 570 - 26-Oct-2020 Index (SXDP) Structured Bank Bonds 244 - 09-Nov-2020 Index (SXDP) Structured Bank Bonds 51 - 09-Nov-2020 Index (SXDP) Structured Bank Bonds 75 - 09-Nov-2020 Index (SXDP) Structured Bank Bonds 1,000 - 23-Oct-2020 Variable Rate (TIIE) Structured Bank Bonds 20 - 07-Nov-2019 Index (SXDP) Structured Bank Bonds 175 - 14-Nov-2019 Index (SXDP) Structured Bank Bonds 148 - 23-Nov-2020 Index (SXDP) Structured Bank Bonds 10 - 05-Nov-2020 Variable Rate (TIIE) Structured Bank Bonds 196 - 14-Dec-2020 Index (SXDP) Structured Bank Bonds 18 - 14-Dec-2017 Index (IBEX35) Structured Bank Bonds 34 - 04-Jan-2016 5% Fixed Rate Senior notes 17,249 14,741 29-Oct-2022 4.125% Fixed Rate Subtotal 40,804 27,314

Less - Issue costs (265) (260) Plus -

Bonus Valuation (578) (177) Accrued interest 162 151 Total $ 40,123 $ 27,028

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20. Bank and other loans As of December 31, 2015 and 2014 were as follows:

2 0 1 5 2 0 1 4

Mexican Foreign

pesos currency Total Total

Demand loans- Received “call money” transactions $ - $ 9,228 $ 9,228 $ 3,004 Loans with foreign banking institutions - 13 13 - Loans with development banking institutions 10 2 12 58 Loans with public fiduciary funds 13 1 14 3

Total demand loans 23 9,244 9,267 3,065

Short-term portion- Loans entered into with national banks - 1,121 1,121 - Loans entered into with foreign banks - 18,870 18,870 21,382 Loans from development banking institutions 2,274 185 2,459 2,331 Loans from public fiduciary funds 4,169 349 4,518 3,757

Total short-term loans 6,443 20,525 26,968 27,470

Long-term portion-

Loans entered into with national banks 5,500 - 5,500 5,500 Loans entered into with foreign banks - 80 80 84 Loans from development banking institutions 18,103 - 18,103 17,390 Loans from public fiduciary funds 2,350 187 2,537 1,436

Total long-term loans 25,953 267 26,220 24,410

Total interbank and other loans $ 32,419 $ 30,036 $ 62,455 $ 54,945 Loans with national banks (not including accrued interest) - As of December 31, 2015, call money transactions performed by Treasury are used to cover liquidity and position leveling needs, which accrue interest at 2.60% and 3.25% in Mexican pesos and 0.23% and 0.53% in US dollars. As of December 31, 2014, call money transactions performed by Treasury are used to cover liquidity and position leveling needs, which accrue interest at 2.75% in Mexican pesos and 0.36% and 0.40% in US dollars. Loans with foreign banks (not including accrued interest) - As of December 31, 2015, the transactions with foreign institutions accrue interest at 0.72% al 1.61%. As of December 31, 2014 the transactions with foreign institutions accrue interest at 0.53% al 1.50%.

Loans with Development Bank Institutions - Loans are granted by Nacional Financiera, S.N.C. (NAFIN) and Banco de Comercio Exterior, S.N.C. (BANCOMEXT), which represent a direct obligation for the Financial Group with these entities. Accordingly, the Financial Group grants their customers loans for financial support in Mexican pesos and US dollars. Loans granted by NAFIN represent financial support in Mexican pesos and US dollars earmarked for the industrial, commercial and service sectors, earmarked for industrial development. Lines of credit for discounts and loans, granted in Mexican pesos and US dollars by the development funds mentioned above, operate under the authorizations of the internal risk units of the Institution. The financial conditions are set under fixed and variable rate programs, both in US dollars and Mexican pesos, and the term is based on the specific program or transaction determined for each project. As of December 31, 2015 and 2014, Santander Consumo contracted a credit line with NAFIN for the amount of $8,500 and $7,000, respectively.

Loans from public fiduciary organizations - Certain Federal Government agencies support discount and credit transactions for different sectors, such as the Banking Fund for Housing Operation and Financing (FOVI), Agricultural Trusts (FIRA).

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21. Comparative maturities of principal assets and liabilities

The maturities of the significant assets and liabilities held as of December 31, 2015 were as follows:

6 Months up to 1 to Over

6 Months 1 Year 5 Years 5 years Total

Assets:

Funds available (1) $ 63,869 $ - $ - $ 35,969 $ 99,838

Margin accounts 1,943 - - - 1,943

Trading securities 39,948 2,545 155,998 10,422 208,913

Securities available for sale 22,008 1,061 66,309 24,425 113,803

Securities held to maturity 2,959 - - 2,679 5,638

Debtors under sale and repurchase agreements 6,207 - - - 6,207

Derivatives 10,770 7,064 50,379 60,576 128,789

Performing loan portfolio (2) 144,779 62,801 206,370 115,547 529,497

Other receivables, (net) 56,644 219 1,556 2,613 61,032

Total assets $ 349,127 $ 73,690 $ 480,612 $ 252,231 $ 1,155,660

Liabilities:

Demand deposits $ 347,800 $ - $ - $ - $ 347,800

Time deposits 167,326 1,531 49 - 168,906

Credit instruments issued 1,399 5,004 14,862 18,858 40,123

Interbank and other loans 32,649 1,405 18,270 10,131 62,455

subordinated liabilities 556 - - 22,232 22,788

Creditors under sale and repurchase agreements 195,103 - - - 195,103

Collateral sold or pledged as guarantee 24,623 - - - 24,623

Derivatives 15,122 9,955 46,806 62,474 134,357

Creditors from settlement of transactions 41,477 30 58 2 41,567

Sundry creditors and other payables 13,867 4,295 77 915 19,154

Total liabilities $ 839,922 $ 22,220 $ 80,122 $ 114,612 $ 1,056,876

Assets less liabilities $ (490,795) $ 51,470 $ 400,490 $ 137,619 $ 98,784

(1) The heading of funds available includes Central Bank compulsory deposits. Such deposits at December

31, 2015, are $35,872 and cannot be disposed.

(2) The heading of current loan portfolio includes the consumer and credit card portfolio, which is

recoverable depending on the individual credit circumstances.

22. Related-party transactions and balances

Transactions are carried out among the companies of the Institution, such as investment, deposits, rendering of

services, etc., most of which generate income for one entity and an expense for another. Transactions and

balances among consolidating companies were eliminated, while those of unconsolidated entities remain in

effect.

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As of December 31, 2015 and 2014, the Institution’s main receivable and payable balances with related

parties are as follows:

2015 2014

Receivable-

Funds available $ 103 $ 126

Debtors under sale and repurchase agreements (1) $ 1,078 $ 629

Derivatives (asset) (2) $ 40,146 $ 28,089

Performing loan portfolio (3) $ 1,535 $ 2,696

Other receivables, (net) (4) $ 6,174 $ 4,465

Payable-

Demand deposits (5) $ 1,803 $ 2,526

Credit instruments issued (6) $ 850 $ 727

Creditors under sale and repurchase agreements $ 7,218 $ 22,268

Derivatives (liabilities) (2) $ 37,931 $ 28,786

Sundry creditors and other payables $ 3,864 $ 2,158

Creditors from settlement of transactions $ 6,488 $ 975

Subordinated liabilities $ 18,440 $ 14,630

As of December 2015 and 2014, the most significant transactions carried out by the Institution with related and

affiliated companies (at nominal values) were as follows:

2015 2014

Revenues-

Interest $ 174 $ 176

Commissions $ 5,474 $ 4,927

Expenses-

Interest $ 1,918 $ 2,245

Administrative expenses $ 440 $ 326

Technical assistance $ 1,710 $ 1,761

Result from derivative financial instrument transactions $ 1,242 $ (1,744)

(1) As of December 31, 2015, debtors and creditors transactions with agreements are as follows:

Active Passive

Casa de Bolsa Santander, S.A. de C.V., Grupo

Financiero Santander México. $ 1,078 $ 7,193

(2) As of December 31, 2015, asset and liability transactions with derivative financial instruments are as

follows:

2015 2014

Active Passive Active Passive

Banco Santander, S.A.

(Spain) $ 38,304 $ 37,214 $ 27,256 $ 28,339

Abbey National Treasury

Services plc (London) 1,668 671 828 426

Others 174 46 5 21

$ 40,146 $ 37,931 $ 28,089 $ 28,786

(3) At December 31, 2015, the entities denominated Produban Servicios Informáticos Generales, S.L.

(PSIG) and Santander Capital Structuring, S.A. de C.V. (SCS), received credits from the Institution for

the amounts of $1,395 and $125, respectively, at the 3.21% (PSIG) and 6.47% (SCS) rates.

83

At December 31, 2014, the entities denominated Produban Servicios Informáticos Generales, S.L.

(PSIG) and Santander Capital Structuring, S.A. de C.V. (SCS), received credits from the Institution for

the amounts of $1,413 and $1,245 respectively, at the 3.39% (PSIG) and 6.17% (SCS) rates.

(4) At December 31, 2015, other accounts receivable are primarily composed by:

Unpaid transactions of $4,698 and $158 with Banco Santander (Spain), S.A. and Casa de Bolsa

Santander, S.A. de C.V., Grupo Financiero Santander México, respectively.

Collectible commissions of $824 from Zurich Santander Seguros México, S.A. (Zurich

Santander) for the placement of insurance policies through Bank branches and $128 from SAM

Asset Management S.A de C.V for the placement of investments in investment funds .

Collateral given for transactions with derivative financial instruments entered into with Banco

Santander, S.A. (Spain) for the amount of $257.

At December 31, 2014, other accounts receivable are primarily composed by:

Unpaid transactions of $2,215 with Banco Santander (Spain), S.A.

Collectible commissions of $747 from Zurich Santander Seguros México, S.A. (Zurich

Santander) for the placement of insurance policies through Bank branches.

Collateral given for transactions with derivative financial instruments entered into with Banco

Santander, S.A. (Spain) for the amount of $756.

Available balances in investment contracts for $469 to Banco Santander, S.A. (Spain).

(5) As of December 31, 2015, time deposits are as follows:

Company Instrument Amount Term (years) Rate

ISBAN México, S.A.

de C.V.

Promissory note in

Mexican pesos $ 540 4 days 3.00%

ISBAN México, S.A.

de C.V.

Promissory note in

US dollars 316 4 days 0.12%

Santander Global

Facilities, S.A de

C.V.

Promissory note in

Mexican pesos 322 4 days 2.98%

Grupo Financiero

Santander Mexico,

S.A.B .de C.V.

Promissory note in


SECORSE, S.A de

C.V.

Promissory note in


Produban Servicios

Informáticos

Generales, S.L.

Promissory note in


Produban Servicios

Informáticos

Generales, S.L. Promissory note in US

dollars 11 4 days 0.12%

Others Promissory note 93 Sundry Sundry

$ 1,803

(6) At December 31, 2015, Banco Santander, S.A. (Spain) have an investment in credit securities issued

by the Institution with the following characteristics:

Series Amount Term Rate

(Days)

BSANTM $ 850 3,671 4.125%

Total $ 850

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(7) As of December 31, 2015, Banco Santander, S.A. (Spain) maintains an investment in subordinated

debentures issued by the Bank, the characteristics of this investment are:

Series Mont Term (days) Rate

Subordinated debentures $ 18,440 3,960 5.95%

Total $ 18,440

The Institution executed professional service contracts with ISBAN México, S.A. de C.V. (“Isban”),

Ingeniería de Software Bancario, S.L. Spain (“Isban Spain”), Produban México, S.A. de C.V. (“Produban”)

and Produban Servicios Informáticos Generales, S.L. (“Produban Spain”) which provide systems

development and operation services, among others. Similarly, the Institution acquired software developed by

Isban, Isban Spain, Produban and Produban Spain for $1,579 and $980 in 2015 and 2014, respectively.

Management believes that transactions with related parties are performed according to the prices and payment

amounts that would be utilized with or between independent parties for comparable transactions.

23. Labor benefits

Under Mexican Labor Law, the Institution is liable for severance payments and seniority premiums to

employees terminated under certain circumstances; there are also other obligations derived from the collective

bargaining agreement.

Each year, the Institution records the net periodic cost to create a fund that covers the net projected obligation

from seniority premiums and pensions, medical expenses and severance payments as it accrues based on

actuarial calculations prepared by independent actuaries, which are based on the projected unit credit method

and the parameters established by the Commission. Therefore, the liability is accrued at the present value of

future cash flows required to settle the obligation from benefits projected to the estimated retirement date of

the Institution’s employees.

In conformity with the collective bargaining agreements and individual employment contracts, the Institution

has a defined benefit liability for retirement pensions and medical expenses to its employees once they retire.

Each year the Institution records the net periodic cost to create a fund that will cover the projected net liability

for pensions, medical expenses, seniority premium and severance, as it is accrued in accordance with actuarial

calculations made by independent actuaries. These calculations are based on the projected unit credit method.

Therefore, the liability is being provisioned which at present value will cover the defined benefits obligations

at the estimated retirement date of all the employees working in the Institution.

The Institution has a defined contribution pension plan and retirement medical expenses, whereby such

institutions agree to pay pre-established cash amounts to a given investment fund, in which the worker

benefits consist of the sum of such contributions, plus or minus the gains or losses from the management of

such funds of those workers who adhered to the new plan, which was optional for them. During 2015 and

2014, the amount recognized by the Institution as an expense for the defined contribution plan was $272 and

$246, respectively.

As of December 31, 2015 and 2014, approximately 1.48% and 1.8% (unaudited) of the Institution’s

employees, respectively, were still enrolled in the defined benefit pension plan while the rest of the employees

had enrolled in the defined contribution pension plan. As of December 31, 2015 and 2014, the investment

fund of the defined contribution pension plan was $3,881 and $4,479, respectively.

At December 31, 2015 and 2014, approximately 78.61% and 83.3% (unaudited) of the workers employed by

the Institution and enrolled in the defined contribution plan have been included in the new Retirement

Medical Coverage subaccount system.

As of December 31, 2015, the Institution amortizes variances based on the estimate of 5.85 years for the

pension plan for retirees, 12.16 years for post-retirement medical services and 9.54 years for seniority

premiums, based on the average remaining years of service.

85

As of December 31, 2014, the Institution amortizes variances based on the estimate of 10.25 years for the

pension plan for retirees, 9.25 years for post-retirement medical services and 14.10 years for seniority

premiums, based on the average remaining years of service. As of December 31, 2015 and 2014, balances and activity reflected in employee benefits from defined benefit

plans of entities that comprise the Institution, which include pension plans, seniority premiums, medical

expenses and severance payments, were as follows:

2015 2014

Projected benefit obligation $ (7,567) $ (7,008) Plan assets 3,881 4,480

Unfunded liability (3,686) (2,528) Unamortized:

Unrecognized actuarial losses 2,771 1,960

Net projected liability $ (915) $ (568)

As of December 31, 2015 and 2014, the net projected liability for severance payments at the end of the

employment relationship for reasons other than restructuring is $415 and $404, respectively. As of December 31, 2015 and 2014, the obligations for acquired benefits are $5,529 and $5,306, respectively. Net periodic cost consists of the following:

2015 2014

Service cost for the year $ 157 $ 143 Financial cost 555 564 Less- Return on plan assets (378) (415) Actuarial losses 150 113 Immediate recognition of actuarial losses for the year 46 33 Effects due to reduction and early settlement (3) (6)

Net periodic cost $ 527 $ 432

The economic assumptions used were as follows:

2015 2014

Discount rate 8.50% 8.25% Expected rate of return of assets 8.50% 8.50% Wage increases rate 5.00% 5.00% Medical inflation rate 7.12% 7.12%

In July 2001, the Institution executed a collective lifetime payment insurance operation agreement for certain

retirees with Principal México Compañía de Seguros, S.A. de C.V. (Principal). Such agreement establishes

that with the payment of the single premium by the Institution, Principal commits to paying insured retirees a

lifetime payment until the death of the last insured retiree. Under such agreement, the Institution’s net worth would not be affected in the future by these insured

persons, since the risk was transferred to Principal. However, in order to record the Institution’s legal

obligation to its retirees in the consolidated balance sheets, the Institution records the projected benefit

obligation of the insured retirees surrendered to Principal under the heading of “Employee retirement

obligations”, and a long-term account receivable with Principal, which is recorded under the heading of

“Other assets (net)” for the funds that it transferred thereto. The amount of the projected benefits obligation

was calculated by the Institution 's external actuaries at the close of the year, based on the estimates used in

the actuarial study for labor liabilities and the remaining personnel. As of December 31, 2015 and 2014, such

liability is $906 and $905, respectively, and is recorded separately under the heading of “Sundry creditors and

other payables”, which for presentation purposes is eliminated against the heading of “Other assets (net)”.

86

As of December 31, 2015, the reserves for employee benefits net of the contributions to the fund, with the

exception of the Casa de Bolsa are presented in the consolidated balance sheets under “Sundry creditors and

other payables”. The changes in net projected obligations were as follows:

2015 2014

Opening balance $ (568) $ (319)

Benefit payment 179 171

Provision for the year (526) (438)

Net projected liability for Santander Vivienda’s acquisition - 6

Contributions for the year - 12

Net projected liability $ (915) $ (568)

Fund movements were as follows:

2015 2014

Opening balance $ 4,480 $ 4,576

Contributions - 12

Actual fund yield (168) 338

Payments made (421) (432)

Transfer to defined contribution plan (10) (14)

Closing balance $ 3,881 $ 4,480

As of December 31, 2015, the Institution had assets related to the defined benefit plan. Such assets were

invested as follows:

Amount %

Fixed income-

Government securities $ 2,566 66%

Other types of securities 302 8%

Variable income 1,013 26%

$ 3,881 100%

Expected return $ 378

Actual return $ (168)

As of December 31, 2015 and 2014, there is no fund created for severance payments at the end of the

employment relationship for reasons other than restructuring. As of December 31, 2015 and 2014, changes in the present value of the defined benefits obligation:

2015 2014

Present value of the defined benefits obligation as

of January 1, 2015 and 2014 $ 7,008 $ 6,580

Labor cost of the current service 157 143

Financial cost 555 564

Benefits actual payment during the year (600) (603)

Extinguished obligations (9) (26)

Obligations decrease (7) -

Actuarial loss (gain) on the obligation 463 350

Present value of the defined benefits obligation as

of December 31, 2015 and 2014 $ 7,567 $ 7,008

87

An increase of one percentage point in the trend rate of health care costs for each year would have resulted in

an additional defined benefit obligation of $610 and $704 as of December 31, 2015 and 2014, respectively,

as well as an increase in the net period cost for 2015 and 2014 of $125 and $126, respectively. A decrease of

one percentage point in the trend rate of health care costs for each year would have resulted in a decrease in

the defined benefit obligation of $506 and $574 as of December 31, 2015 and 2014, respectively, as well as a

decrease in the net period cost for 2015 and 2014 of $102 and $104, respectively.

24. Statutory Profit Sharing

The Institution determined its PTU basis by considering the basis used for income tax purposes, albeit without

limiting it to one month’s wages, as established by Section III of article 127 of the LFT.

The deferred PTU amount recorded in the results at December 31, 2015 and 2014 under the heading of

“Administrative and promotional expenses” is $(202) and $38, respectively. At December 31, 2015 and 2014,

the Institution has a liability of $233 and $213, respectively, for current PTU payable.

At December 31, 2015 and 2014 deferred PTU is composed as follows:

2015 2014

Deferred PTU asset:

Undeducted allowance for loan losses $ 1,588 $ 1,930

Property, furniture, and equipment and deferred charges 760 645

Accrued liabilities 374 445

Unaccrued share tax losses 797 766

Commissions and interest received in advance 150 121

Foreclosed assets 66 47

Labor obligations 74 -

Exchange derivatives instruments 214 -

Surplus value from financial instruments - 158

Deferred PTU asset 4,023 4,112

Deferred PTU liability:

Net gain in financial instruments (454) -

Labor obligations - (12)

Exchange rate - related financial transactions - (646)

Prepaid expenses (81) (51)

Others (56) (39)

Deferred PTU liability (591) (748)

Less - Valuation allowance (160) (225)

Deferred PTU asset (net) $ 3,272 $ 3,139

25. Creditors from settlement of transactions

As of December 31, 2015 and 2014, are as follows:

2015 2014

Debt securities $ 10,068 $ 8,522

Indexed shares 18 268

Foreign currency 31,194 14,993

Option contracts 287 682

$ 41,567 $ 24,465

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26. Sundry creditors and other payables

As of December 31, 2015 and 2014, sundry creditors and other payables were as follows:

2015 2014

Investments in personnel pensions and seniority premiums $ (3,881) $ (4,480)

Provision for labor obligations at retirement 4,796 5,048

Net projected liability 915 568

Provisions and other creditors 13,563 14,592

Cashier checks and certificates 900 1,015

Credit letters and drafts payable 1,156 1,075

Value added tax payable 814 809

Other obligations 197 189

Creditor bank compensation 1,609 3,785

$ 19,154 $ 22,033

The line item provision for sundry obligations includes reserves for tax, labor and legal contingencies

established by the Institution at yearend.

Target Related Stock Plan

During 2009, Management formolized the agreement known as the "Performance share plan” (the Plan),

which was approved locally by the Audit Committee and Corporate Practices, and by the Board of Directors,

and the Stockholders’ General Meeting. The Plan consists of the free delivery of shares (or “Performance

Shares”), which is conditioned upon the continued employment of the eligible officers in the Institution for

the time established for the respective cycle and reaching targets related to a) the total return for the

shareholder (RTA), according to the behavior of the share quotation of the Parent Company and b) the profit

per share (BPA).

The Plan consists of six cycles where a maximum number of shares representing the capital of the Parent

Company were assigned from the year 2009 until 2014, subject to reaching the aforementioned targets.

For the year ended December 31, 2014, the Institution recognized a charge to earnings for this item in the

amount of $10.

Equity benefits plan

On April 27, 2009, the Board of Directors of Banco Santander, S.A. (Spain) approved a supplementary

Program to the Pension Plan (the Program), which will be part of the benefits included in the total

compensation of the participating directors. This Program is exclusively for a reduced sector (designated by

the Human Resources Department of Banco Santander, S.A. (Spain)).

As of December 2015 and 2014, seven and nine directors participated in this program, respectively.

The Program consists of the Institution contribution based on fixed remuneration (salary, yearend bonus and

vacation premium), where the percentage is variable and is based on the employee’s seniority. The

accumulated balance may be provided at the end of the employment relationship subject to the provisions of

the Program.

The first contribution to this Program was made during the year 2009.

At the close of December 2015 and 2014, the Institution recorded in results an expense of $17 and $14,

respectively.

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27. Outstanding subordinated debentures

Tier 2 Subordinated Notes

On December 27, 2013, the Institution placed debt instruments denominated as Tier 2 Subordinated Notes for

the amount of US$ 1,300 million, equal to 1,300,000 instruments with a nominal value of US$ 1,000 each for

a 10-year period with the option of advance amortization in year five. The instruments were issued according

to Rule 144ª and Regulation S of the 1933 US Securities Act with a discount of US$ 10 million.

Interest is paid semiannually every January 30 and July 30 of each year, beginning July 30, 2014. Principal

will be paid at maturity of the instruments, earning an annual initial rate of 5.95%.

The main characteristics of this issuance are as follows:

- If advance payment is not made in year five, the respective interest rate applicable during the second

five-year period will be based on the rate set for US five-year Treasury Notes at that time, plus the

spread defined in the placement prospectus.

- The instruments have a loss absorption mechanism based on a “write-down”, which will be triggered

when basic capitalization ratio levels (Tier 1) of 4.5% are reached.

- A partial, proportional write-down until recovering a basic capitalization ratio (Tier 1) of 7%.

- When a capitalization ratio of 8% is determined: Early warning activation- The deferral of principal or interest or other measures determined by the

Commission. Cause of revocation - A possible write-down due to remediation default.

- The possibility of advance payment based on the inability to treat the subordinated notes as supplementary capital

(Tier 2) due to the non-deductibility of interest or increased tax to be withheld.

28. Income taxes

The Institution is subject from 2014 only to ISR. In addition, the income tax rate for the years 2014, 2015 and

following will be 30%.

ISR is calculated considering certain effects of inflation, such as depreciation calculated according to values

at constant prices. In addition, the effect of inflation on certain monetary assets and liabilities is accrued or

deducted for the purpose of determining taxable income.

Based on financial the Institution will pay income tax (ISR), for which reason it recognizes only deferred ISR.

The ISR provision recorded in results is comprised as follows:

2015 2014

Current expense:

ISR $ 4,984 $ 2,121

Deferred (expense) benefit:

ISR $ (875) $ 1,224

Reconciliation of the accounting-tax result- The principal items which affected the determination of the tax

result of the Institution were the annual adjustment for inflation, the accounting-tax effect on the purchase and

sale of shares, provisions, the result from market valuation, the difference between accounting and tax

depreciation and amortization, and the deduction for bad debts taken by a subsidiary for which there is no

recognized deferred tax asset.

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Tax Loss Carryforwards - At December 31, 2015, the Institution has tax loss carryforwards, which will be

indexed until their year of application for the restated amount of:

Maturity

Applicable

Tax Loss

2017 $ 1

2020 261

2021 175

2022 5

2023 24

2024 81

2025 1

Total $ 548

Based on the acquisition of Santander Hipotecario from GE Capital México, the former has restated tax loss

carryforwards of $655 that are considered as an account receivable from GE Capital México, which

guaranteed their recovery.

The heading “Taxes and employee statutory profit sharing (net)” on the balance sheet is comprised as follows:

2015 2014

Deferred ISR $ 14,865 $ 13,746

Deferred PTU asset (net) (Note 24) 3,272 3,139

$ 18,137 $ 16,885

Deferred ISR- As of December 31, 2015 and 2014, they are comprised as follows:

2015 2014

Deferred ISR asset:

Undeducted allowance for loan losses $ 10,278 $ 10,584

Property, furniture, and equipment and deferred charges 2,279 1,938

Accrued liabilities 1,355 1,486

Tax loss carry forwards (shares) 2,392 2,299

Tax loss carry forwards (other) 162 176

Impairment of financial instruments - 480

Labor obligations 225 15

Exchange rate-related financial transactions 641 -

Commissions and interest received in advance 483 407

Foreclosed assets 312 234

Deferred ISR asset: 18,127 17,619

Deferred ISR (liability):

Exchange rate-related financial transactions - (1,937)

Net gain in financial instruments (1,355) -

Prepaid expenses (280) (205)

Deferred PTU (982) (941)

Others (166) (116)

Deferred ISR (liability): (2,783) (3,199)

Less - Valuation allowance (479) (674)

Deferred income tax asset (net) $ 14,865 $ 13,746

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Management records a valuation allowance for the deferred income tax asset in order to recognize the

deferred tax asset that they believe will be recovered, considering for such purposes the effects of the tax

credit for non-deductible allowances for loan losses that is expected to reverse, based on the financial and tax

projections prepared by management. The recovery of such asset is dependent on the economic and operating

conditions under which such projections were prepared. Deferred taxes are recorded in earnings or

stockholders’ equity as the corresponding account, depending on how the item underlying the anticipated

deferred tax was recorded.

The reconciliation of the legal ISR rate and the effective rate expressed as a percentage of profit before ISR is:

2015 2014

Legal tax rate 30% 30%

Less - Effect of loan portfolio - (3%)

Effect of financial instruments (4%) (4%)

Effects of tax inflation (3%) (4%)

Legal tax rate 23% 19%

Other Tax Matters:

The following balances are in effect at December 31, 2015 and 2014:

2015 2014

Net Tax Income Account $ 9,311 $ 12,438

Contributed Capital Account $ 85,473 $ 91,107

Net Reinvested Tax Income Account $ 66 $ 111

29. Stockholders’ equity

As of December 31, 2015 and 2014, capital stock, at nominal value, was as follows:

Number of shares

2015 2014 2015 2014

Fixed capital -

Series "F" shares 67,792,912,762 67,792,912,762 $ 6,779 $ 6,779

Series "B" shares 13,062,491,041 13,062,491,041 1,307 1,307

Total 80,855,403,803 80,855,403,803 $ 8,086 $ 8,086

At the Stockholders’ Annual Ordinary General Meeting of April 28, 2015, it was agreed that given the

consolidated financial statements approved by the Assembly reported a net income in fiscal year 2014 in the

amount of $14,049, the following applications were made:

a) The rest of the Institution’s income, independently, for the amount of $9,101 under the account

“Retained Earnings”.

b) The net consolidated income for the year by its subsidiaries for the amount of $4,948 under the

account “Retained Earnings”.

During the Stockholders’ Annual Ordinary General Meeting of April 28, 2015, a cash dividend was declared

of $3,534 to the stockholders of the Institution taken from the “Retained Earnings” account which was paid

on May 28, 2015.

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During the Stockholders’ Ordinary General Meeting of November 25, 2015, a cash dividend was declared of $3,226 to the stockholders of the Institution taken from the “Retained Earnings” account which was paid on December 21, 2015. Series “F” shares may only be acquired by Grupo Financiero Santander, S.A.B. de C.V. or, directly or indirectly, by Banco Santander, S.A. (Spain), except when such shares are transferred in guarantee or in

ownership to the Bank Savings Protection Institute. These shares can only be sold with the prior authorization of the Mexican Treasury Department. No authorization shall be required from such Agency and corporate bylaws will not have to be amended when the transfer of shares is either in guarantee or ownership, to the Bank Savings Protection Institute. Foreign corporations that exercise functions of authority may not participate under any circumstances in the

capital of the Institution. National financial entities cannot do either, including those which form part of the Institution, except when they act as institutional investors, pursuant to article 19 of the Law on Financial Groups (LRAF). If dividends are distributed without incurring the applicable tax to the Institution, such tax must be paid when the dividend is distributed. Therefore, the Institution must keep track of profits subject to each rate.

Capital reductions incur tax based on the amount by which the distributed amount exceeds its tax value determined according to the Income Tax Law. Since January 1, 2015 and according to the reforms of the Income Tax Law, dividends paid by Mexican companies to individuals and foreign residents are subject to the payment of an additional 10% ISR; however,

tax treaties can be applied in the case of foreign residents. The Institution, is subject to the statutory provision that requires that when less 10% of the net profits of each year, are separated and transferred to a capital reserve fund, until this is equal to the amount of the share capital paid. In the case of the Santander Consumo and the other subsidiaries, legal provision establishes the Constitution of a legal reserve of 5% of the net profit up to 20% of the amount of the share capital. This

reserve is not susceptible to distribute to shareholders during the existence of the institution, except in the form of dividends in shares.

30. Share-based payments

Corporate performance shares plan

On July 22, 2014, the Board of Directors of the Institution approved the Corporate performance shares plan for senior managers subject to the objectives and conditions set out in the Compensation Plan.

The Compensation plan will be paid annually for the next three years, with payment dates on June 2016, 2017 and 2018 subject: a) the permanence of the senior management in the Institution during the time set for the section, b ) the fulfillment of the objective linked to the total shareholder return ("RTA") according to the evolution of the shares of th Financial Group, and c) that certain clauses in the Compensation Plan (malus clauses) are not met.

The objective linked to the RTA during the term of the Compensation plan is as follows: a) for the first tranche will be the RTA accumulated during 2014 and 2015, b) for the second tranche will be the RTA accumulated during 2014, 2015 and 2016, and c) for the third tranche will be the RTA accumulated during 2014, 2015, 2016 and 2017.

The Institution’s management determined on 2015 according to the RTA reached during 2014, the number of shares for each eligible executive ("Initial Target"). After initial objective, multiannual objectives will operate in order to deduct a percentage of the incentive set under the RTA accumulated since the beginning of the Compensation plan and until last year the corresponding payment. According to the number of senior managers selected and specifications of the Compensation plan, the fair

value of the plan is $ 49.

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During 2015, the Institution recognized in the consolidated Income Statement under the heading "Administrative expenses and promotion" an amount totaling $8 for services received, with a corresponding adjustment in the heading "Sundry creditors and other payables "in the consolidated Balance Sheet. Performance share plan In July 2012, the Board of Directors of the Institution approved a compensation plan for senior executives which shall have the right to receive shares of the capital stock of the Financial Group once fulfilled certain conditions. This plan is paid annually during the first three years after the secondary public offering of 24.9% of the share capital carried out in the month of September 2012 by the Financial Group and is linked to the revaluation of the Financial Group action in the Mexican stock market during this period of time. According to this plan, eligible executives will obtain a cash incentive which must be irrevocably used to acquire the Financial Group’s shares at an exercise price of $31.25 pesos per share (the “incentive”). Each year, the incentive is linked to the attainment of two independent objectives. If these objectives are attained annually, a third part of the total incentive amount is granted to eligible executives. The attainment of each objective depends on the payment of 50% of the maximum annual incentive amount to eligible executives who remain as active officers of the Institution when each of the three plan payments is made: 1. Absolute revaluation of the Institution’s share.- Fifty percent of the incentive applicable to each

tranche or third assigned to each eligible executive will be delivered if: a) the share revaluation at the annual assignment date is equal to or higher than 15%, while 25% of the incentive will be delivered in each tranche or third if b) the share revaluation at the annual assignment date is equal to or higher than 10%; c) if an intermediate revaluation objective of between 10% and 15% is attained, the resulting incentive amount is calculated based on a lineal interpolation.

2. Relative revaluation. - Fifty percent of the maximum incentive assigned to each eligible executive will

be delivered if the evolution of the Institution's share value is at least equal to the behavior of the IPC during the period in question.

According to the number of eligible officers and the compensation plan specifications described above, the fair value is $358. During 2014, the Institution recognized in the consolidated income statement under the heading “Administrative and promotion expenses for the amount of $139 for both years, for compensation of share-based payments against “Sundry creditors and other creditors” within the consolidated balance sheet. During September 2014 and 2013, as the Institution’s absolute and relative share value growth objectives were attained, it made the first and second cash incentive payment of the plan for eligible executives. The incentive amounts paid to eligible executives in 2014 and 2013 were $115 and $110, respectively, equal to 3,687,589 and 3,535,284 shares, respectively, at a price of $31.25 per share. Annual bonus for certain Institution officers The Institution established a policy of paying a deferred annual bonus, payable in cash and shares. This bonus was previously paid in the shares of the Parent Company. Similarly, a percentage of this bonus is paid at the start of the following year, while the remaining percentage will be paid in equal parts during the three subsequent years. This final portion will be subject to the attainment of certain objectives established in the policy. At December 31, 2015, the Institution recognized the amount of $153 for the annual bonus payable in the Financial Group’s shares in the consolidated statement of income under the heading of “Administrative and promotion expenses”. At December 31, 2014, the Institution recognized the amount of $117 for the annual bonus payable in the Financial Group’s shares in the consolidated statement of income under the heading of “Administrative and promotion expenses”.

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31. Preventive savings protection mechanism

On January 19, 1999, the Bank Savings Protection Law was approved and IPAB was created to establish a

bank savings protection system in favor of individuals that perform any of the guaranteed transactions, and to

regulate financial support granted to full service banking institutions in order to protect the interests of

depositors.

IPAB’s resources come from the mandatory contributions paid by financial institutions, according to the risk

to which they are exposed. Such contributions are calculated based on the capitalization level of each

Institution and other indicators set forth in IPAB’s bylaws issued by its Board of Directors. These

contributions must be equivalent to one-twelfth of four-thousandths of the monthly average of the daily

balances of liabilities activities of the applicable month.

For 2015 and 2014, the amount of the fund contributions payable by the Institution, as determined by the

IPAB, were $2,238 and $1,887 respectively.

32. Contingencies

As of December 31, 2015 and 2014, the Institution was the defendant in various legal proceedings and claims

arising in the ordinary course of business. While this situation represents contingent liabilities, according to

the Institution’s management and their legal, tax and labor lawyers, in the event of an unfavorable final

decision, they do not expect any significant effect on the consolidated financial statements.

a. IPAB Indemnity:

As of December 31, 2015 and 2014, Grupo Financiero Serfin (which was merged with Grupo

Financiero Santander Mexicano, S.A., currently Grupo Financiero Santander México, S.A.B. de C.V.)

was the defendant in various legal proceedings and claims arising in the ordinary course of business.

While this situation represents contingent liabilities, according to management and its legal, tax and

labor lawyers, in the event of an unfavorable final decision, they do not expect any significant adverse

effect on the consolidated financial statements. This is because all or most of them are covered by the

agreement to purchase shares of the capital stock of Grupo Financiero Serfin, S.A. and Subsidiaries

(Grupo Financiero Serfin) entered into by the Institution and IPAB, as described below.

According to the purchase-sale contract executed for the shares of Grupo Financiero Serfin between

the Institution and the IPAB, the latter must respond to the Institution for any amount resulting from

any kind of administrative, legal or arbitration proceedings filed against Grupo Financiero Serfin

and/or the Financial Entities of Grupo Financiero Serfin (Banca Serfin (merged with Banco Santander

Mexicano and currently denominated Banco Santander (México)), Operadora de Bolsa Serfin (merged

with Casa de Bolsa Santander Mexicano, currently denominated Casa de Bolsa Santander),

Almacenadora Serfin (a company liquidated in October 2013), Factoraje Serfin (merged with

Factoring Santander; after the merger, the new entity was denominated Factoring Santander Serfin,

which subsequently merged with Banco Santander Mexicano and is currently denominated Banco

Santander (México)), and Seguros Serfin (formerly Seguros Serfin Lincoln, the absorbing company of

Seguros Santander Mexicano, subsequently denominated Seguros Santander and finally sold in July

2013), prior to the execution of the contract (May 23, 2000) and for a maximum three-year period as of

that date, and which result in the issuance of a definitive sentence by the Mexican authorities or courts

or foreign courts when involving a definitive sentence with a standardized counterpart in Mexican law,

or a definitive arbitration ruling with a standardized counterpart in Mexican law.

According to Clause 11 of the above agreement, IPAB is liable before the buyer and designated buyer,

accordingly, for any amount of taxes assessed on Grupo Financiero Serfin and/or its financial entities

by the Mexican tax authorities, including contributions to the Mexican Social Security Institute

(“IMSS”) and National Institute of the Workers’ Housing Fund (“INFONAVIT”). This liability,

however, will apply only to taxes, penalties, surcharges and tax restatements payable prior to the date

of transfer of title to the shares of Grupo Financiero Serfin, or generated through that date, but paid on

a later date.

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Also, IPAB is therefore liable before the buyer and designated buyer for any amount resulting from

labor claims related to a final adverse court decision issued against Grupo Financiero Serfin and/or its

financial entities, or derived from any agreement executed before the respective arbitration panels,

provided that such claims were filed prior to the date of transfer of ownership of the shares of Grupo

Financiero Serfin.

The share purchase agreement also establishes that: a) the reserves established by Grupo Financiero

Serfin and Banca Serfin for the respective amounts of $546 and $91 (nominal value), relative to legal

and labor contingencies at the transfer date of the shares, as described in Exhibit G of the agreement,

must be restated against Group Financiero Serfin’s stockholders’ equity for an amount equal to the

result of applying the CETES rate to the reserves and b) the fees and expenses incurred in connection

with services rendered to defend these entities from any legal, labor, arbitration or administrative

claim, will be borne by IPAB. If this agreement is not fulfilled, IPAB will be released from any

obligation to cover the above-mentioned contingencies.

If Grupo Financiero Serfin and/or its financial entities are required to transfer to IPAB any liabilities

resulting in disputes due to administrative, legal or arbitration proceedings against Grupo Financiero

Serfin and/or its financial entities, the Institution will have Grupo Financiero Serfin and/or its financial

entities take all the necessary steps to transfer such liabilities to IPAB or to any legal vehicle or entity

appointed by IPAB.

Neither Grupo Financiero Serfin nor its financial entities recorded any contingency reserve, in addition

to that recorded prior to their acquisition by the Institution, in connection with any item generated from

transactions performed prior to the transfer date of the shares of Grupo Financiero Serfin to the

Institution, since IPAB will take the measures mentioned in the preceding paragraphs if any

contingency should arise.

As of December 31, 2015 and 2014, the amount of the maximum contingencies related to the lawsuits

that are covered by the IPAB, without considering those undetermined, is $163 and $167, respectively.

b. Fiduciary area:

As of December 31, 2015, Management has recorded a provision of $140 (nominal value), to cover the

contingency derived from the fiduciary area in which the Institution acts as trustee.

The Institution’s fiduciary division is currently analyzing internal documentation, Institution’s

Management believes that there will be no additional contingencies that could materially affect the

consolidated financial statements of the Institution.

c. Legal contingencies:

At December 31, 2015 and 2014, as a result of its business activities (without considering

contingencies derived from hedges with the IPAB), the Institution has had certain claims and lawsuits

representing contingent liabilities filed against it. Notwithstanding, management and its internal and

external legal, tax and labor advisers do not expect such proceedings to have a material effect on the

consolidated financial statements in the event of an unfavorable outcome. As of December 31, 2015

and 2014, the Institution has recorded contingency reserves for the amounts of $975 and $1,198,

respectively, that have been included under the “Sundry creditors and other accounts payable” account,

which, based on the opinion of its internal and external legal advisors, Management considers to be

adequate.

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33. Memorandum accounts

For purposes of the presentation required by the Commission the memorandum accounts form part of the

consolidated balance sheet; however, the only memorandum accounts covered by the external audit are those

used to record transactions which are directly related to consolidated balance sheet accounts, as follows:

banks of customers, settlement of customer transactions, securities of customers received in custody,

repurchase agreements on account of customers, securities loan transactions on account of customers,

collateral received as security on account of customers, derivatives purchase transactions, derivatives sale

transactions, contingent assets and liabilities, credit commitments, collateral received, sold or given in

guarantee, and uncollected accrued interest derived from the non-performing credit portfolio.

Aside from the above memorandum accounts, the Institution also has the following:

a. Assets in trust or mandate (unaudited) -

As of December 31, 2015 and 2014, the Institution administered the following trusts and mandates:

2015 2014

Trusts-

Administration $ 100,443 $ 102,687

Guarantee 13,581 8,378

Investment 27,263 24,432

141,287 135,497

Mandates 243 247

Total assets in trust or mandate $ 141,530 $ 135,744

b. Assets in custody or under administration (unaudited)-

As of December 31, 2015 and 2014 the Institution has the following assets in custody and under

administration:

2015 2014

Bank securities $ 94,359 $ 92,146

Capital Market 788,390 790,094

Collection documents 1,556 1,869

Credit operations 252,984 245,569

Government securities 1,192,307 1,202,750

Furniture and property 366,018 263,668

Obligations 116,517 91,631

Other received guarantees 17,294 46,050

Other securities 119,591 105,141

Promissory notes, deposit certificates and exchange

bills 397,615 354,239

Total assets in custody or under administration $ 3,346,631 $ 3,193,157

As of December 31, 2015 and 2014, the revenues generated by this type of assets were $424 and $374,

respectively.

c. Other record accounts (unaudited)-

As of December 31, 2015 and 2014, other record accounts have a balance of $936,795 and $656,653,

respectively.

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34. Other operating income As of December 31, 2015 and 2014 are as follows:

2015 2014

Recovery of previously written-off loans $ 2,443 $ 2,164 Cancellation of liabilities and reserves 316 239 Gain on property disposal - 2 Technical advisory services 36 46 Interest on personnel loans 114 111 Write-offs and bankruptcies 52 (100) Legal expenses and portfolio recovery costs (828) (654) Provision for legal and tax contingencies (1,215) (728) Allowance for losses on foreclosed assets 15 (212) Gain on foreclosed assets sale (88) (40) Gain on loan portfolio sale 237 478 Others 295 145

Total $ 1,377 $ 1,451

35. Commitments As of December 31, 2015 and 2014, the Institution has signed agreements for the provision of services (to be received) related to its operations, less than 20.9% and 21.3%, respectively, of operating expenses, which form part of its current spending.

36. Segments information As of December 31, 2015, the Institution provides integrated financial services to its clients, which include banking and credit operations, brokerage services and fund management for retirement pensions. The principal data by business segment are as follows:

Segments

Commercial Global Corporate Total

Bank1 Wholesale Banking2 Activities Institution

Financial margin $ 37,230 $ 4,046 $ 1,309 $ 42,585 Allowance for loan losses (16,223) (1,021) - (17,244) Financial margin after allowance for loan losses 21,007 3,025 1,309 25,341 Net fees 12,637 1,672 13 14,322 Intermediation result 935 806 539 2,280 Other operating income (expenses) 1,340 3 34 1,377 Administrative and promotion expenses (22,289) (2,516) (288) (25,093) Operating income 13,630 2,990 1,607 18,227 Equity in results of associated companies - - 81 81 Income before income taxes 13,630 2,990 1,688 18,308 Incurred and deferred income taxes - - - (4,109) Income before discontinued operations - - - 14,199 Discontinued operations - - - - Net income - - - 14,199 Non-controlling interest - - - (13) Net consolidated income - - - 14,186

Significant balance sheet data: Total loan portfolio $ 430,831 $ 116,884 $ 30 $ 547,745 Customer deposits $ 396,471 $ 74,162 $ 73,073 $ 516,706

(1) Includes Individuals, Small and Medium Businesses, Companies, Institutions and Local Corporate. (2) Includes Global Corporate, Treasury, Investment Banking and Fund Management.

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37. Comprehensive risk management (unaudited figures)

The Institution considers risk management as a competitive element of a strategic nature with the sole purpose of maximizing the value generated for stockholders. This risk management is defined, both conceptually and organizationally, as the comprehensive treatment of the different risks (market, liquidity, credit, counterparty, operating, legal and technology risks) assumed by the Institution in the normal course of business. The way in the Institution manages the risk inherent in its transactions is essential to understand and determine how its financial position will behave and create value in the long term. In compliance with the prudent regulations for comprehensive risk management applicable to credit institutions, issued by the National Banking and Securities Commission, the Board of Directors agreed to set up the Institution Comprehensive Risk Management Committee, based on the guidelines established in the aforementioned provisions. This Committee meets monthly and ensures that operations adhere to the objectives, policies and procedures approved by the Board of Directors for Comprehensive Risk Management. The Comprehensive Risk Management Committee delegates responsibility to the Comprehensive Risk Management Unit for implementing procedures to measure, manage and control risks according to established policies. Likewise, it also grants powers to the UAIR to enable it to authorize established limits to be exceeded, although the Board of Directors must be informed of these departures. Market Risk -

The Market Risk Management Department of the Comprehensive Risk Management Unit is responsible for recommending the market risk management policies to be implemented by the Institution, by establishing the parameters for measuring risks and delivering reports, analyses and evaluations to senior management, to the Comprehensive Risk Management Committee and to the Board of Directors. Market risk management consists of identifying, measuring, monitoring and controlling the risks derived from the fluctuations of interest and exchange rates, market prices and other risk factors in currency and money markets and related to derivative financial instruments to which the Institution's positions are exposed. The measurement of market risk quantifies the potential change in the value of the positions assumed as a result of changes in market risk factors. Depending on the type of activities performed by the business units, debt securities and share certificates are recorded as trading securities, securities available for sale and/or securities held to maturity. In particular, after the item of securities available for sale, what underlies and identifies them as such is their permanent status, and they are handled as a structural part of the consolidated balance sheets. The Institution has established guidelines which must be applied for securities available for sale, as well as adequate controls to ensure their compliance. When significant risks are identified, they are measured and assigned limits to ensure adequate control. The risk is measured from a global perspective through a combination of the methodology applied to trading portfolios and that applicable to the management of assets and liabilities. Trading Portfolios-

To measure risks using a global approach, the Value at Risk (“VaR”) method is followed, which is defined as the statistical estimate of the potential loss of value of a specific position at a specific period of time and with a specific level of confidence. The VaR is a universal measure of the exposure level of the various risk portfolios. It helps compare the risk level assumed among different instruments and markets, expressed in the exposure level of each portfolio through a unique figure in economic units. The VaR is calculated by historical simulation with a window of 521 business days (520 for percentage changes), and a one-day horizon. The calculation is made based on the series of losses and gains simulated by considering the 1% percentile using constant Mexican pesos and Mexican pesos decreasing exponentially with a decline factor that is reviewed annually, and the most conservative measurement is reported. The level of reliance is variable. A 99% level of reliance is assumed.

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The historical simulation model has the limitation of assuming that the recent past represents the immediate

future.

The quarterly Value at Risk in 2015 (unaudited) was:

*% of VaR related to Net Equity

VaR thousands of

Mexican pesos

%

Trading markets 69,735.32 0.07% Market Making 58,259.95 0.06%

Proprietary Trading 21,726.44 0.02%

Risk factor 69,735.32 0.07% Interest rate 59,886.46 0.06%

Exchange rate 4,295.92 0.00%

Variable income 5,464.36 0.01% The average quarterly Value at Risk in 2015 (unaudited) was: *% of VaR related to Net Equity

VaR thousands of

Mexican pesos

%

Trading markets 76,539.79 0.07%

Market Making 64,653.05 0.06%

Proprietary Trading 27,585.59 0.03%

Risk factor 76,539.79 0.07% Interest rate 72,656.21 0.07%

Exchange rate 4,159.72 0.00%

Variable income 5,767.39 0.01% Furthermore, monthly simulations are performed of portfolio losses or gains through evaluations under

different scenarios (Stress Tests). These estimates are generated in two ways:

By applying percentage changes observed in a given period of the history, which covers significant

market turbulence, to the risk factors.

By applying changes that depend on the volatility of each to the risk factors

Monthly “back-testing” is performed to match daily losses and gains to determine whether the same positions have been maintained, while only comparing the change in value due to market movements with the value at risk calculation in order to calibrate utilized models. Although prepared monthly, these reports include all daily tests.

Management of assets and liabilities -

The Institution’s commercial banking activities generate significant consolidated balance sheet amounts. The

Assets and Liabilities Committee (“ALCO”) is responsible for determining guidelines for managing risk for

the financial margin, net worth and liquidity, which must be followed in the different commercial portfolios.

Under this approach, Finance Senior Management is responsible for executing the strategies defined in the

Assets and Liabilities Committee in order to modify the risk profile of the commercial balance sheet by

following the policies established. Therefore, it is essential to adhere to information requirements for interest

rate, exchange rate and liquidity risks.

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As part of the financial Management performed by the Institution, the sensitivity of the financial margin

(“NIM”) and net worth (“MVE”) of the different consolidated balance sheet headings is analyzed against

interest rate variations. This sensitivity derives from the differences between the expiration and modification

dates of interest rates generated in the different headings of assets and liabilities. The analysis is based on the

classification of each heading sensitive to interest rates over time, depending on their dates of amortization,

expiration or contractual amendment of the applicable interest rate.

The following table shows metrics as a proportion of the established limit:

Sensitivity 1% NIM Sensitivity 1% MVE

Oct-15 Nov-15 Dec-15 Average Oct-15 Nov-15 Dec-15 Average

Balance Mexican

pesos GAP 56% 39% 44% 46% 59% 61% 61% 60%

Balance US dollars GAP 43% 67% 39% 50% 75% 48% 38% 54%

Simulation techniques are used to measure the foreseeable valuation of the financial margin and net worth

value under different interest rate scenarios and the sensitivity of both elements in the event of an extreme

movement at the December 31, 2015 close.

Millions of Mexican pesos Sensitivity 1% NIM Sensitivity 1% MVE

Total Derivatives Non-Derivatives Total Derivatives Non-Derivatives

Balance Mexican pesos GAP (666) (309) (357) (3,454) 673 (4,128) Balance US dollars GAP (134) 159 (294) (232) 371 (603)

The Assets and Liabilities Committee adopts investment and hedge strategies to keep these sensitivities

within the objective range.

Limits

Limits are used to control the global risk for the Institution, based on each of their portfolios and books. The

limits structure is applied to control exposures and establish the total risk applied to the business units. These

limits are established for the VaR, loss alert, maximum loss, volume equivalent of type of interest, delta

equivalent of variable income, foreign currency open positions, sensitivity of the financial margin and

sensitivity of net worth.

Liquidity risk

Liquidity risk is associated with the Institution’s capacity to finance the commitments undertaken at

reasonable market prices, and to carry out its business plans with stable financing sources. The influencing

factors may be external (“liquidity crisis”) or internal due to excessive concentrations of expirations.

The Institution carries out coordinated management of expirations of assets and liabilities, performing

oversight of maximum profiles of time lags. This oversight is based on analysis of expirations of assets and

liabilities, in relation to contracts and management. The Institution exercises control to maintain a sufficient

amount of liquid assets to guarantee a survival horizon during a minimum number of days in the event of a

liquidity stress scenario without resorting to additional financing sources. The Liquidity Risk is limited in

terms of a minimum period of days established for local, foreign and consolidated currencies.

Liquidity Collateral Exposure

The following table shows the liquidity collateral exposure of assets and liabilities with different maturities at

December 31, 2015:

Millions of pesos Total 1D 1S 1M 3M 6M 9M 1A 5A >5A

Structural gap 125,647 142,821 32,209 (92,047) 5,110 33,696 10,663 8,123 (58,403) 42,474

Non-derivatives 131,044 143,818 30,632 (92,433) 4,661 34,147 11,795 8,314 (59,927) 50,036 Derivatives (5,397) (998) 1,578 386 449 (451) (1,132) (191) 1,524 (6,562)

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Credit Risk The management of the Institution’s credit risk is developed differently for the different customer segments through the three phases of the credit process: admission, follow-up and recovery. From a global standpoint, the management of credit risk in the Institution covers the identification, measurement, composition and valuation of aggregated risk and the profitability adjusted to such risk, whose purpose is to oversee the levels of risk concentration and adjust them to established limits and objectives. The risks which receive individual treatment are identified and differentiated (risks with companies, financial institutions and entities) from those handled in standardized fashion (consumer and mortgage loans of private parties and loans to business and micro-companies). In the case of risks to which an individual treatment is applied, the Institution has a solvency classification or “rating” system that calculates the probability of noncompliance, which enables it to measure the risk associated with each customer from the start of the respective transaction. The customer valuation obtained after analyzing the relevant risk factors in different areas is subsequently adjusted based on the specific characteristics of the transaction (guarantee, term, etc.). Standardized risks, given their special characteristics (a large number of transactions involving relatively small amounts) require different handling that ensures effective treatment and efficient allocation of resources, for which automatic decision-making tools are used (expert and credit scoring systems). The treatment of business loans is also complemented, in its follow-up stage, with the so-called “special oversight system”, which determines the policy to be followed in handling risk with companies or groups classified in such category. Several special oversight situations or degrees are distinguished, from which different actions may arise. The special oversight rating is reached either by alert signals, systematic reviews or special initiatives promoted by the Risk Division or Internal Audit. Recovery Units are a fundamental element in the management of irregular risks and are intended to minimize the final loss incurred by the Institution. These units perform specialized risk management activities based on the classification of a given risk as irregular (timely payment noncompliance). The Institution has implemented a policy of selective growth of the risk and strict actions in the treatment of late payments and its provisions, based on the prudent criteria defined by the Institution. Allowance for loan losses According to the Comprehensive Risk Management guidelines detailed in the General Provisions Applicable to Credit Institutions, as part of their credit risk management, credit institutions must calculate the Probability of Default, the Loss Severity of the credit and the Exposure at Default of the credit in order to determine the allowance for loan losses for each loan portfolio. (See note 3. Significant accounting policies - Classification of the loan portfolio and allowance for loan losses). Counterparty Risk The overall credit risk includes a concept whose peculiar nature requires specialized handling: Counterparty risk. Counterparty risk is that which the Institution assumes with government, government agencies, financial institutions, corporations, companies and individuals in its treasury and correspondent banking activities. Its measurement and control of credit risk in financial instruments, counterparty risk, is handled by a special unit whose organizational structure is independent of the business units. The control of counterparty risk is handled each day through the Interactive Risk Integrated System (“IRIS”) system, which ascertains the line of credit available with any counterparty, in any product and for any term. The Equivalent Credit Risk (“REC”) is used for control of the counterparty lines. The REC is an estimate of the amount that the Institution can lose on current transactions with a given counterparty, if the latter does not meet its commitments, at any time up to the date of maturity of the operations. The REC considers the Current Credit Exposure, defined as the cost of replacing the transaction at market value, provided that such value is positive for the Institution, and is measured as the market value of the transaction (MTM).

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Furthermore, the REC incorporates the Potential Credit Exposure or Additional Potential Risk (RPA), which

represents the possible evolution of the current credit exposure up to expiration, based on the characteristics

of the transaction and possible variations in market factors. The Gross REC considers the definitions

described above, without considering mitigating factors like “netting” or collateral.

The calculation of the Net REC also takes into consideration the existence of mitigating factors of credit risk

of counterparties, such as collateral agreements, “netting” agreements, among others .

Apart from the Counterparty Risk, there is the risk of settlement, which arises in any transaction at its

expiration date, given the possibility that the counterparty will not comply with its obligations to pay the

Institution, once the Institution has satisfied its obligations by issuing the respective payment instructions.

Specifically, for the process control this risk, the Executive Director of Financial Risk daily monitors

compliance with the limits credit risk by counterparty, by product, term and other conditions of the

authorization for financial markets. It is also the area responsible for communicating daily, limits,

consumption and any deviation or excessive incurred.

Furthermore, monthly reports are submitted to the Comprehensive Risk Management Committee and

quarterly reports are sent to the Board of Directors regarding Counterparty Risk Limits, Issuer Risk Limits

and current consumption, incurred excesses and transactions with unauthorized customers. Information is also

provided regarding the calculation of the Expected Loss from current transactions performed on financial

markets at each monthly close, together with different Expected Loss stress scenarios based on the

methodology and assumptions are approved by the Comprehensive Risk Management Committee.

The Institution has currently approved Counterparty Risk Lines for the following sectors: Mexican Sovereign

Risk and Local Development Banking, Foreign Financial Institutions, Mexican Financial Institutions,

Corporations, Company Banking-SGC, Institutional Banking, Large Enterprise Unit and Project Finance.

The Net REC of counterparty risk lines in the issuer risk of the Institution at the close of the fourth quarter of

2015 is as follows:

Equivalent Risk to Net Credit


Segment Oct-2015 Nov-2015 Dec-2015 Average

Sovereign risk, development

banks and financial

institutions 23,588.26 22,378.87 21,342.68 22,436.60

Corporate 1,266.16 1,244.29 1,070.01 1,193.49

Company banking 155.64 144.58 174.01 158.08

The Maximum Gross REC of the Institution’s counterparty risk lines at the close of the fourth quarter of 2015

and which is related to derivative transactions, is distributed in the following manner according to derivative

type:

Equivalent Risk to the

Maximum Gross

Credit

Derivative (Millions of US dollars)

Interest rate derivatives 17,225

Exchange rate derivatives 24,332

Fixed income derivatives 3

Share derivatives 1,519

Total 43,079

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The expected loss at the close of the fourth quarter of 2015 and the average quarterly expected loss of

counterparty risk lines and the issuer risk of the Institution of the fourth quarter of 2015 are detailed below:

Expected Loss Fourth Quarter 2015


Segment Oct-2015 Nov-2015 Dec-2015 Average

Sovereign risk, development

banks and financial

institutions 4.57 9.05 9.27 7.63

Corporate 2.81 2.73 2.60 2.71

Companies 1.03 1.28 1.51 1.27 The segments of Mexican financial institutions and foreign financial institutions are very active counterparties

with which the Institution has current financial instruments positions with a counterparty credit risk. Please

note that the Gross REC is mitigated by the existence of netting agreements (“ISDA-CMOF”) and, in certain

cases, by collateral agreements (“CSA-CGAR”) or revaluation agreements with counterparties, which result

in the Net REC.

As regards the total collateral received for derivative transactions at the close of the fourth quarter of 2015:

Cash collaterals 68.42%

Collateral in bonds issued by the Federal Government 31.58% Operating Risk

In terms of Operating Risk, the Institution has policies, procedures and methodologies to identify, control,

mitigate, oversee and disclose Operating Risks.

Different categories and business lines have been established to identify and measure operating risks, in

which operating incidences are grouped in accordance with the methodology applied. This methodology

begins with the identification and documentation of processes, based on self-evaluation tools, and considers

the development of historical databases and indicators of Operating Risk, for the purposes of the respective

control, mitigation and disclosure.

Legal Risk

Legal risk is defined as the potential loss from noncompliance with applicable legal and administrative

provisions, the issuance of adverse administrative and court rulings and the application of penalties in relation

to the transactions performed by the Institution.

The following activities are performed in compliance with Comprehensive Risk Management guidelines: a)

Establishment of policies and procedures to analyze legal validity and ensure the proper instrumentation of

the legal acts performed, b) Estimate the amount of potential losses derived from unfavorable legal or

administrative rulings and the possible application of penalties, c) Analyze legal acts governed by a legal

system outside México, d) Publication among managerial personnel and employees of legal and

administrative provisions applicable to transactions, and e) Performance, at least annually, of internal legal

audits.

Technological Risk

Technological risk is defined as the potential loss from damages, interruption, alteration or failures derived

from the use of or dependence on hardware, software, systems, applications, networks and any other

information distribution channel used in the provision of bank services with the customers of the Institution.

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The Institution has realized a model to deal with Technological Risk, which is currently integrated into the service and support processes of the systems areas, in order to identify, oversee, control and report on the Systems Technology Risks to which the operation is exposed, and is intended to prioritize the establishment of control measures that will reduce the probability of risks becoming reality. Risk diversification - In accordance with the general risk diversification provisions applicable to credit institutions in the performance of debit and credit transactions, published in the Federal Official Gazette on April 30, 2003, the Bank reports that the following credit risk transactions are maintained at December 31, 2015: At December 31, 2015, no financing has been granted to debtors or groups of individuals representing

a joint risk, the individual amount of which exceeds 10% of the Institution’s basic capital (of the month immediately preceding the reporting date).

The Asset and Liability operations granted to the three largest debtors or groups of persons which

represent common risk for the aggregate amount of $36,121, representing 44.97% of the basic capital of the Institution.

Authorization levels and processes Pursuant to internal regulations, all products and services marketed by the Institution are approved by the Local Committee of New Products (CLNP) and the Global Committee of New Products (CGNP). Products or services whose original authorization is amended or increased require the approval of the CLNP and, depending on their significance, of the CGNP as well. All of the areas involved in the operation of the product or service, depending on their nature, as well as those responsible for their accounting, legal documentation, tax treatment, risk assessment, participate in the Committee. The authorizations of the Committees must be unanimous as there are no authorizations granted by a majority of members. In addition to the Committees’ approval, certain products require the authorization of local authorities; therefore, the approvals of the Committees are conditional upon the authorization required by competent authorities, as applicable. Apart from the approval of the Commercialization Committee, there are products which require authorization from local authorities; consequently, the approvals of the Commercialization Committee are conditional upon obtaining any authorizations required from the competent authorities in each case. Finally, all approvals are presented to the Comprehensive Risk Management Committee (CAIR) for authorization. Independent reviews The Institution is subject to the supervision and oversight of the Commission, Central Bank and Bank of Spain, which are exercised through follow-up processes, inspection visits, information and documentation requirements and submission of reports. Likewise, periodic reviews are performed by Internal and External Auditors. Generic description of valuation techniques Derivative financial instruments are valued at their fair value according to the accounting standards detailed in the Sole Circular for Credit Institutions issued by the Commission through Accounting Criterion B-5, Derivative Financial Instruments and Hedge Transactions. A. Valuation methodology

i. For trading purposes

a. Organized markets

The valuation is made using the closing price of the respective market and the prices are provided by a price supplier.

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b. OTC

i) Derivative financial instruments with optionality

In most cases, a generalized form of the Black and Scholes model is used, which

assumes that the underlying asset follows a lognormal distribution. For exotic

products or when the payment depends on the trajectory of a market variable,

Monte Carlo simulations are used for valuation purposes. In this case, the

assumption is that the logarithms of the variables involved follow a multivariate

normal distribution.

ii) Derivative financial instruments without optionality

The valuation technique is to obtain the present value of future estimated flows.

In all cases, the Institution values its positions and records the value obtained. However, in

certain cases a different calculation agent is established, which could be the same counterparty

or a third party.

ii. For hedging purposes

In its commercial banking activity, the Institution has attempted to cover the evolution of the

financial margin of its structural portfolios exposed to adverse shifts in interest rates. The

Assets and Liabilities Committee (ALCO) the body responsible for managing long-term assets

and liabilities, has been building the portfolio with which the Institution obtains such coverage.

A transaction is classified as an accounting hedge when the following conditions are met:

a. The hedging relationship is designated and documented at the beginning in an individual file,

setting its objective and strategy.

b. The hedge is effective for purposes of offsetting variances in fair value or cash flows

attributable to the hedged risk, consistently with the initially documented risk management.

The management of the Institution performs derivative transactions for hedging purposes with swaps

and exchange rate swaps (IRS and CCS) and forwards.

Derivatives for hedging purposes are valued at market value and the effect is recognized in accordance

with the type of accounting hedge, as follows:

a. For fair value hedges, the hedged risk of the primary position and the derivative hedging

instrument are valued at market, recording the net effect in earnings.

b. For cash flow hedges, the derivative hedging instrument is valued at market. The effective

portion of the hedge is recorded in stockholders’ equity under comprehensive income and the

ineffective portion is recorded in earnings.

The Institution suspends hedge accounting when the derivative has matured, has been sold, cancelled

or exercised, when it does not reach a sufficiently high effectiveness level to offset the changes in the

fair value or cash flows of the hedged item, or when the hedging designation is cancelled.

It must be shown that the hedge effectively complies with the objective for which the derivatives were

contracted. This effectiveness requirement assumes that the hedge must comply with a maximum

deviation range of 80% to 125% in regard to the initial objective.

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The effectiveness of the hedges must be proven by applying two tests:

a. Prospective test: shows that in the future the hedge will remain within the maximum range.

b. Retrospective test: reviews whether the hedge has remained within the maximum range from its

establishment to date.

At December 31, 2015, fair value and cash flow hedges are prospectively and retrospectively efficient

and are located within the maximum permitted departure range.

B. Reference variables

The most relevant reference variables are:

Exchange rates

Interest rates

Shares

Baskets and share indexes.

C. Valuation frequency

Derivative financial instruments for trading purposes are valued daily.

Management of internal and external liquidity sources that may be used for requirements related to

derivatives financial instruments -

Resources are obtained through the Domestic and International Treasury areas

Changes in the exposure to identified risks, contingencies, and known or expected events of derivative

financial instruments -

As of December 31, 2015, the Institution does not have any situations or contingencies, such as changes in the

value of the underlying assets or reference values, which may mean that the use of the derivatives may differ

from their original use, significantly modify their scheme or imply a full or partial loss of coverage that may

require the Issuer to assume new obligations, commitments, or cash flow variances that affect its liquidity (for

margin calls); or contingencies or events that are known or expected by management of the Institution, which

may affect future reports.

During 2015, the number of matured derivative financial instruments and closed positions was as follows

(unaudited):

Description Maturity Closed Positions

Caps and Floors 2,076 42

Equity Forward 52 25

OTC Equity 3,107 810

OTC Fx 6,347 2,153

Swaptions 66 88

Fx Forward 6,039 512

IRS 3,181 1,830

CCS 737 545

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During 2014, the number of matured derivative financial instruments and closed positions was as follows

(unaudited):

Description Maturity Closed Positions

Caps and Floors 1,616 213

Equity Forward 51 73

OTC Equity 3,192 806

OTC Fx 4,547 1,554

Swaptions 352 107

Fx Forward 4,808 822

IRS 7,521 3,543

CCS 489 333

The number of margin calls made during 2015 and 2014 was that necessary to cover both contributions in

organized markets and those required in collateral agreements.

During 2015, there were no counterparty defaults.

Sensitivity analysis -

- Risk identification -

The market risks sensitivity measurements associated with securities and derivative financial

instruments measure the variation (sensitivity) in the market value of the financial instrument in

question with regard to the variations of each of the related risk factors.

The sensitivity of the value of the financial instruments as regards the modification of market factors is

obtained by completely revaluing the instrument.

The sensitivities determined according to each risk factor and the historical consumption associated

with the trading portfolio are detailed below:

The management strategy employed by the Institution is composed by positions based on securities

and derivative financial instruments. The latter are primarily contracted to mitigate the risk generated

by the former. Accordingly, sensitivity or exposure measurements consider both instrument types

taken as a whole.

1. Sensitivity to Equity (EQ Delta) risk factors

The EQ delta indicates the change in portfolio value in relation to the changing prices of assets

with variable returns.

In the case of derivative financial instruments, the calculated EQ delta considers a relative

variation of 1% in the prices of variable assets with variable returns. In the case of securities

with variable returns, the calculated EQ delta considers a relative variation of 1% in the security

market price.

2. Sensitivity to Foreign Exchange (FX Delta) risk factors

The FX delta indicates the change in value of the portfolio with regard to changing exchange

rate asset prices.

In the case of derivative financial instruments, the calculated FX delta considers a relative

variation of 1% in the prices of underlying exchange rate assets. In the case of currency

positions, it considers a relative variation of 1% in the respective exchange rate.

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3. Sensitivity to Volatility (VEGA) risk factors

The Vega sensitivity is the measurement derived from changes in the volatility of the

underlying asset (reference asset). The Vega risk represents the risk of a change in the volatility

of the underlying asset, which results in a change in the market value of the derivative financial

instrument.

The calculated Vega activity considers an absolute variation of 1% in the volatility associated

with the value of the underlying asset.

4. Sensitivity to Interest Rate (Rho) risk factors

The sensitivity quantified the variation in the value of the financial instruments contained in the

trading portfolio given a parallel increase of one basis point of interest rate curves.

The “Sensitivity Analysis” table presents the above sensitivities related to the trading portfolio

position:

Total rate sensitivity

Mexican pesos Other currencies

(Millions of

Mexican pesos)

Sensitivity to 1 basis point 0.21 0.69

Vega per risk factor EQ FX IR

Total 2.13 (0.52) (0.18)

Delta per risk factor (EQ and FX) EQ FX

Total 0.73 2.72

It is considered that the above sensitivity tables reflect the prudential management of the trading

portfolio of Institution’s with regard to risk factors.

Stress Test of derivative financial instruments

The different stress test scenarios are presented below and consider the different hypothetical scenarios

calculated for the Institution's trading portfolio.

Probable Scenario: This scenario was defined based on the movement of a standard deviation of the

risk factors which affect the valuation of instruments which have maintained the trading portfolio in

each period. More specifically:

o The risk factors of interest rate (IR), volatilities (VOL) and Exchange rate (FX) increased by a

standard deviation, and

o The stock market (EQ) risk factors decreased by a standard deviation.

Possible Scenario: In this scenario the risk factors move by 25%.

o The risk factors IR, FX, VOL are multiplied by 1.25, i.e., they increase by 25%.

o The EQ risk factors are multiplied by 0.75, i.e., they decrease by 25%.

Remote Scenario: In this scenario the risk factors move by 50%.

o The risk factors IR, FX, VOL are multiplied by 1.50, i.e., they increase by 50%.

o The EQ risk factors are multiplied by 0.5, i.e., they decrease by 50%.

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Impact on earnings

The results for such scenarios are as follows, showing the impact in earnings if they took place:

Summary of the Stress Test analysis

Risk Profile

Stress Test

(all factors)

Probable Scenario $ (6)

Remote Scenario (148)

Possible Scenario (167)

38. Capitalization ratio

As of December 31, 2015, the Institution in accordance with the capitalization requirements applicable to full

service banks in effect, the Institution presents the following capitalization ratio, which exceeds the minimum

level required by the authorities:

Transactions referenced to:

Assets at Risk

Equivalent Positions Capital Requirement

Nominal rate in Mexican pesos $ 50,367 $ 4,029

Nominal rate in Mexican pesos (surtax) 6,456 516

Actual rate in Mexican pesos (UDI, INPC and SMG) 22,752 1,820

Nominal rate in foreign currency 23,618 1,889

Positions in UDI, INPC and SMG 31 2

Currency position 7,493 599

Stock portfolio 853 68

Vega and Gamma 858 69

Total market risk 112,428 8,992

Counterparty with derivatives and repurchase agreements 27,845 2,228

Adjustment to credit valuation 45,392 3,631

Issuer positions debt instruments 12,706 1,016

Borrowers in credit transactions 207,971 16,638

Guarantors, credit lines and securitizations 20,730 1,658

Internal Models, authorized segments 172,796 13,824

Total credit risk 487,440 38,995

Total operating risk 64,255 5,140

Total risk $ 664,123 $ 53,127

Capitalization calculation:

Required Basic Capital 7.00% $ 46,489

Actual Basic Capital 12.10% 80,328

Capital Overage 5.08% 33,839

Required Basic Capital 8.50% 56,450



Required Basic Capital 10.50% 69,733



For further detail see (Annex 1-O), http://www.santander.com.mx.

http://www.santander.com.mx/informacioninversionistas

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39. Liquidity Coverage Coefficient (unaudited figures)

On December 31, 2014, the Commission and the Banco de México published in the Federal Official Gazette,

the General Provisions on the Liquidity Requirements for Full Service Banks, which establish the liquidity

requirements that credit institutions must fulfill at all times, in conformity with the instructions established by

the Bank Liquidity Regulatory Committee at its meeting of October 17, 2014.

Such Provisions went into effect on January 1, 2015.

In the fourth quarter, the weighted average of the Liquidity Coverage Coefficient for the Institution is

107.45%, which complies with the Desired Risk Profile and exceeds the regulatory minimum established.

(Figures in millions of pesos pesos)

Unweighted amount

(average)

Weighted amount

(average)

Computable Liquid Assets

1 Total Computable Liquid Assets N/A $ 130,983

Cash Disbursements

2 Unsecured retail financing $ 159,306 11,538

3 Stable financing 87,860 4,393

4 Less stable financing 71,446 7,145

5 Unsecured wholesale financing 328,504 128,262

6 Operational deposits 209,720 49,110

7 Non-operational deposits 99,371 59,738

8 Unsecured debt 19,413 19,413

9 Guaranteed wholesale financing N/A 526

10 Additional requirements: 53,812 37,858

11

Disbursements related to financial derivatives and other

collateral requirements 36,086 36,086

12

Disbursements related to losses from debt instrument

financing - -

13 Lines of credit and liquidity 17,726 1,773

14 Other contractual financing obligations - -

15 Other contingent financing obligations 111,358 9,293

16 Total Cash Disbursements N/A 187,476

Cash Receipts

17 Cash receipts from guaranteed transactions 38,359 5,639

18 Cash receipts from unsecured transactions 59,185 42,545

19 Other cash receipts 17,338 17,338

20 Total Cash Receipts 114,882 65,522

Adjusted amount

21 Total Computable Liquid Assets N/A 130,983

22 Total Net cash Disbursements N/A 121,953

23 Liquidity Coverage Coefficient N/A 107.45%

The figures presented are subject to review and may therefore be amended.

Information on the Liquidity Coverage Coefficient

a) Calendar days included in the quarter which is being disclosed.

92 days.

b) Principal causes of the results of the Liquidity Coverage Coefficient and the evolution of its primary

components.

Throughout the quarter there was an improvement in the mixture of deposits, resulting in an

increase in stable deposits, apart from the increase in the volume of liquid assets.

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c) Changes in the principal components in the quarter being reported.

Throughout the quarter there was an improvement in the mixture of deposits, resulting in an

increase in stable deposits, apart from the increase in the volume of liquid assets.

d) Evolution of the composition of the Eligible Computable Liquid Assets.

The Institution maintains a significant percentage of liquid assets in government debt, deposits

in Banco de México and cash.

e) Concentration of financing sources.

The principal financing sources are diversified due to their inherent nature, as follows: (i)

Deposits payable upon demand; (ii) Term deposits which include deposits from the general

public and the money market (promissory notes with yields payable at maturity), and (iii)

repurchase agreements.

The Institution also has debt issue programs in local markets and has experience in issues in

international markets.

f) Exposures in financial derivatives and possible margin calls.

The analysis performed does not show weaknesses in financial derivatives.

g) Mismatch in foreign currencies.

The analysis performed does not show weaknesses in the mismatch of foreign currencies.

h) Description of the degree of centralization of liquidity management and interaction between the

group’s entities.

The Institution is independent in terms of liquidity and capital; it develops its own financial

plans, liquidity projections and analyzes financing needs for all its subsidiaries. It is responsible

for its “ratings”, prepares its own issue program, “road shows” and other necessary activities to

sustain its ability to access capital markets independently. It carries out its market issues

without resorting to the collateral of the parent company.

The management of the liquidity of all the Institution’s subsidiaries is centralized.

i) Cash flow disbursements and receipts which, as the case may be, are not captured in the present

framework, but which the Institution believes relevant for its liquidity profile.

The Liquidity Coverage Coefficient considers only cash flow disbursements and receipts up to

30 days; however, the cash flows which are not included within the proprietary metric are also

handled and controlled by the Institution.

Information on the Liquidity Coverage Coefficient of the previous quarter

I.Quantitative information:

a) Concentration limits regarding the different groups of collateral received and the principal financing

sources.

Banco de México is within the concentration limits established by regulators, because the risk

mitigation of market transactions is addressed by using government debt instruments or cash,

which do not have concentration limits.

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b) Exposure to liquidity risk and financing needs, bearing in mind the legal, regulatory and operational

limitations on the transfer of liquidity.

The liquidity risk is related to the capacity to finance obligations under reasonable market terms,

and to carry out the business plans with stable financing sources. The factors which influence the

liquidity risk may be external, such as liquidity crises, or internal, such as excessive concentrations

of maturities.

The measures used to control exposure to liquidity risk in the management of the balance sheet are

the mismatch of liquidity, liquidity ratios, stress tests and liquidity horizons.

The liquidity horizons metric establishes a survival deadline in terms of days for different stress

scenarios, in which the liquid assets should be sufficient to fulfill the commitments acquired. A

limit of 90 days has been established for the local currency and the consolidated balance sheet and a

limit of 30 days for foreign currency. During the third quarter of 2015, the balance is maintained

above the established limits and always with a sufficient liquidity surplus.

September 30, 2015 Term Amount

(Millions of pesos)

Consolidated 90 days $ 57,508

Mexican Pesos 90 days 34,184

Foreign Currency 30 days 42,748

c) Balance sheet transactions itemized by maturity deadlines and the resulting liquidity gaps, including the

transactions recorded in memorandum accounts.

The following table shows the liquidity mismatch of our assets and liabilities with different

maturities as of September 30, 2015. The amounts reported include cash flow from interest on fixed

and variable rate instruments. The interest on the variable rate instruments is determined using the

forward interest rates for each period presented.

Total 0-1 month 1-3 months 3-6 months 6-12 months 1-3 years 3-5 years > 5 years Not sensitive

(Millions o pesos)

Money market $ 143,638 $ 122,232 $ 507 $ 125 $ 9 $ 37 $ 36 $ 18 $ 20,674

Loans 636,744 90,858 57,927 49,261 66,141 170,645 64,745 143,680 (6,514)

Foreign trade financing - - - - - - - - -

Intragroup (5) - - - - - - - (5)

Securities 346,558 315,924 1 1 1 5,985 - - 24,646

Permanent 5,140 - - - - - - - 5,140

Other assets on the balance sheet 69,506 - - - - - - - 69,506

Total assets on the balance sheet 1,201,581 529,014 58,435 49,387 66,151 176,667 64,781 143,698 113,447

Money market (284,067) (260,290) (2,816) (3,919) (12,464) (1,824) (1,337) - (1,418)

Deposits (449,625) (147,589) (49,731) (38) (14,353) (237,914) - - -

Foreign trade financing (596) - - - - - - - (596)

Intragroup - - - - - - - - -

Long-term financing (146,452) (21,404) (2,373) (9,478) (24,454) (35,133) (26,520) (27,090) -

Capital (97,408) - - - - - - - (97,408)

Other liabilities on the balance sheet (123,906) - - - - - - - (123,906)

Total liabilities on the balance sheet (1,102,054) (429,283) (54,920) (13,435) (51,271) (274,871) (27,857) (27,090) (223,328)

Total mismatch on the balance sheet $ 99,527 $ 99,731 $ 3,515 $ 35,952 $ 14,880 $ (98,204) $ 36,924 $ 116,608 $ (109,881)

Total mismatch off the balance sheet $ 1,641 $ (569) $ (233) $ 2,517 $ (1,345) $ (347) $ 2,665 $ (4,006) $ 2,959

Total structural mismatch 101,168 99,162 3,282 38,469 13,535 (98,551) 39,589 112,602 (106,922)

Accumulated mismatch 99,162 102,444 140,914 154,450 55,899 95,487 208,089 101,169

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II. Qualitative information:

a) The way in which liquidity risk is managed, considering for such purpose the tolerance for such risk;

the structure and responsibilities for liquidity risk management; internal liquidity reports; the liquidity

risk strategy and the policies and procedures through the business lines and with the Board of

Directors.

Our policy in terms of liquidity management seeks to ensure that, even under adverse

conditions, we have sufficient liquidity to meet customer needs, maturities of liabilities and

working capital requirements. The Institution manages the maturities of the assets and liabilities

by overseeing contractual and procedural time lags.

The Financial Management area is responsible for executing the strategies and policies

established by the ALCO for the purpose of modifying the risk profile of the Institution’s

liquidity risk, within the limits approved by the Comprehensive Risk Management Committee

which reports to the Board of Directors.

b) Financing strategy, including the diversification policies, and whether the financing strategy is

centralized or decentralized.

Each year the Institution prepares the annual financial plan, considering for such purpose: the

business’s growth projections, the debt maturities profile, the related appetite for risk, the

expected market conditions, compliance with diversification policies and regulatory metrics, as

well as the liquidity buffer analysis. The financial plan provides the guidance for issuing debt or

contracting term liabilities, and its purpose is to maintain an adequate liquidity profile.

The financing strategy of all the subsidiaries is centralized.

c) Liquidity risk mitigation techniques used.

The risk mitigation techniques used in the Institution are proactive. The financial plan, apart

from the preparation of projections and stress scenarios, also helps to anticipate risks and carry

out measures to ensure that the liquidity profile is appropriate.

d) Explanation of how the stress tests are used.

The Liquidity Stress Tests are a Comprehensive Risk Management tool designed to warn the

different governance bodies and personnel who take liquidity decisions in the Institution, about

the possible adverse effects derived from the Liquidity Risks to which it is exposed.

The results of the stress tests are intended to identify the effects prospectively with the aim of

improving the planning processes, and helping to adjust and calibrate the Appetite for Risk, the

Exposure Limits and Tolerance Levels to Liquidity Risk.

e) Description of the contingent financing plans.

The plan includes the following elements: type and model of business to contextualize the plan.

There is a list of Early Alert Indicators identified to timely detect liquidity risk situations, as

well as the elements which define a financial crisis. Also, liquidity shortfalls are analyzed

should the aforementioned stress scenarios materialize, and the appropriate measures are

selected to restore liquidity conditions. A general order of priority is established for the

measures to be taken so as to preserve the value of the entity and the stability of markets. One

of the fundamental aspects of the plan is the governance process, which indicates the areas

responsible for the different phases: activation, execution, communication and maintenance of

the plan itself.

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40. Ratings

As of December 31 2015, the Institution maintains the following classifications

Moody’s Fitch Ratings

Global level-

Foreign currency:

Long-term A3 BBB+

Short-term P-2 F2

Mexican pesos:

Long-term A3 BBB+

Short-term P-2 F2

National level -

Long-term Aaa.mx AAA(mex)

Short-term Mx-1 F1+(mex)

Feasibility Classification (VR) - bbb+

Support Classification (SR) - 2

Counterparty Risk (CR)

Long-term A2 (cr) -

Short-term P-1 (cr) -

Credit Risk Evaluation (BCA) baa1 -

Perspective Stable Stable

Internation issues:

Subordinated Notes Tier 2 under Basle III with maturity in

2024 Baa3 BB+

Senior Notes with maturity in 2022 A3 BBB+

Last publication 18-Dec-15 25-Jun-15

41. New accounting principles

Modifications in accounting criteria issued by the Commission

On November 25, 2015 several amendments to the accounting criteria for credit institutions were published in

the Federal Official Gazette. The purpose of these amendments is to make the necessary adjustments to the

accounting criteria of credit institutions for the operations they perform, in order to have reliable financial

information. These amendments went into effect on January 1, 2016.

a. Accounting Criterion C-5, Consolidation of special-purpose entities, is eliminated.

b. The following are added as part of the accounting criteria of the Commission: NIF C-18, Obligations

associated with the retirement of property, plant and equipment, and NIF C-21, Agreements with joint

control, due to the enactment of such standards by the CINIF.

c. For the consolidated financial statements, it is established that those special-purpose entities (“SPE”)

created before January 1, 2009 in which control was maintained, will not be required to apply the

provisions contained in NIF B-8, Consolidated or combined financial, in relation to their consolidation.

d. It is established that overdrafts on checking accounts of customers who do not have a credit line for

such purposes, will be classified as overdue debts and at the same time as such classification an

estimate must be established for the total amount of such overdraft at the time this occurs.

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e. It is established that the net asset for defined benefits to employees must be presented on the balance

sheet under the heading of “Other assets”.

f. It is specified that the applicable regulation must be applied according to that set forth by Banxico to

include the purchase of foreign currencies which are not considered derivatives, as “Funds available”.

g. It is established that if the balance of foreign currencies to be received offset with foreign currencies to

be delivered should reach a negative balance, such item must be presented under the heading of “Other

accounts payable”.

h. It is established that if any item of restricted funds available should reach a negative balance, such item

must be presented under the heading “Other accounts payable”. Previously, restricted funds available

were not considered for such presentation.

i. The definition of “Transaction costs” in Accounting Criterion B-2, Investments in securities and in

Accounting Criterion B-5, Derivatives and hedge operations, is modified.

j. The definitions of “Borrower”, “Appraisal Percentage Guarantees”, “Payment capacity”, “Extended

Portfolio”, “Assignment of Credit Rights”, “Consolidation of Credits”, “Debtor of Credit Rights”,

“Vendor of Discounted Receivables”, “Financial Factoring”, “Purchaser of Discounted Receivables”,

“Line of Credit”, “Discount Transaction”, “Special Repayment Regime”, “Ordinary Repayment

Regime” and “Housing Subaccount”, are incorporated into Accounting Criterion B-6, Loan Portfolio

k. The definition of “Renewal” is modified in Accounting Criterion B-6, Loan Portfolio, to now consider

it as that transaction in which the loan balance is settled partially or totally, through an increase in the

total amount of the loan, or using the proceeds derived from another loan contracted with the same

entity, involving either the same debtor, a joint obligor of such debtor, or another person who, due to

his asset ties, represents common risks.

l. “Mortgage Loans” are defined as those credits intended for remodeling or improvement of the home

which are backed by the savings in the borrower’s housing subaccount, or have a security interest

granted by a development bank or a public trust established by the Federal Government for economic

development.

m. Loans for financial factoring, discount and credit right assignment operations are incorporated in the

definition of “Commercial Loans”.

n. It is clarified that a loan will not be considered as renewed for any dispositions made during the

effective term of a pre-established line of credit, provided that the borrower has settled the total

amount of the payments which are due and payable under the original loan conditions.

o. It is established that when credit dispositions made under a line of credit are restructured or renewed

independently from the line of credit which supports them, they must be assessed in accordance with

the characteristics and conditions applicable to the restructured or renewed disposition or dispositions.

When as a result of such evaluation it is concluded that one or more dispositions granted under a line

of credit should be transferred to overdue portfolio due to the effect of their restructuring or renewal

and such dispositions, individually or collectively, represent at least 40% of the total disposed balance

of the line of credit at the date of the restructuring or renewal, such balance, as well as its subsequent

dispositions, must be transferred to overdue portfolio as long as there is no evidence of sustained

payment of the dispositions which originated the transfer to overdue portfolio, and the total

dispositions granted under the line of credit fulfilled the due and payable obligations at the date of

transfer to current portfolio.

The aforementioned percentage is applicable as of January 1, 2016, and will be reduced to 30% for the

year 2017, and 25% for the year 2018 and thereafter.

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p. It is established that in the case of loans acquired from INFONAVIT or the FOVISSSTE, where there

is an obligation to respect the terms which the aforementioned agencies contracted with the borrowers,

sustained payment of the loan is deemed to exist when the borrower has timely settled the total due and

payable amount of principal and interest, of at least one repayment in the credits under the Ordinary

Repayment Regime (ROA) and three repayments for the loans under the Special Repayment Scheme

(REA).

q. It is stipulated that for restructurings of loans with periodic payments of principal and interest whose

repayments are less than or equal to 60 days in which the periodicity of payment is modified to shorter

periods, the number of repayments equivalent to three consecutive repayments under the original loan

payment scheme must be considered.

r. The assumptions are established to consider that sustained payment exists for those loans with a single

payment of principal at maturity, regardless of whether the payment of interest is periodic or at

maturity, as follows:

i. The borrower must have paid at least 20% of the original loan amount at the time of the

restructuring or renewal, or,

ii. The amount of the accrued interest must have been paid in accordance with the payment

scheme for the respective restructuring or renewal at a term of 90 days.

s. With regard to consolidated loans, if two or more loans originated the transfer to overdue portfolio of

the total balance of the consolidated loan, to determine the repayments required to consider their

sustained payment, the original loan payment scheme whose repayments are equal to the longest

repayment period must be considered. Previously the practice was to give the treatment for the worst

of the credits to the total balance of the restructuring or renewal.

t. It is established that evidence must be made available to the Commission when demonstrating

sustained payment to substantiate that the borrower has the appropriate payment capacity at the time

the restructuring or renewal is performed, so as to meet the new loan conditions.

u. It is clarified that the advance payment of installments of restructured or renewed loans, different from

those with a single payment of principal at maturity, regardless of whether the interest is paid

periodically or at maturity, is not considered to be sustained payment. This is the case with repayments

of restructured or renewed loans which are paid before the calendar day’s equivalent to loans with

repayments that cover periods greater than 60 calendar days have elapsed.

v. The extension of the loan term is incorporated as a restructuring situation.

w. The respective standards for the recognition and valuation of financial factoring, discounting and credit

right assignment transactions are included.

x. It is established that commissions and fees different from those collected for granting the credit will be

recognized in results of the year on the date that they are accrued, and if part or all of the consideration

received for the collection of the respective commission or fee is received before the accrual of the

respective income, such advance must be recognized as a liability.

y. The item stating that overdrafts in customer checking accounts should be reported as overdue portfolio

is eliminated.

z. It is established that repayments which have not been fully settled under the terms originally agreed

and are 90 days or more in arrears with the payments related to the loans which the entity acquired

from the INFONAVIT or the FOVISSSTE, in accordance with the respective REA or ROA payment

modality, as well as the loans made to individuals for the remodeling or improvement of the home for

no speculative purposes which are backed by the savings from the borrower’s housing subaccount, will

be considered as overdue portfolio.

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aa. The transfer to overdue portfolio of the loans referred to in the preceding point will be subject to the

exceptional deadline of 180 or more days in arrears as of the date on which:

i. The loan resources are disposed of for the purpose for which they were granted,

ii. The borrower begins a new employment relationship in which he has a new employer, or

iii. The partial payment of the respective repayment was received. The exception contained in this

subsection will be applicable provided that it refers to credits under the ROA scheme, and each

of the payments made during such period represents at least 5% of the repayment agreement.

bb. It is specified that loans with a single payment of principal at maturity, regardless of whether the

interest is paid periodically or at maturity, will be considered as overdue portfolio as long as there is no

evidence of sustained payment.

cc. It will be considered that loans granted under a new line of credit, revolving or not, which are

restructured or renewed at any time, may remain in current portfolio provided that there are grounds to

justify the payment capacity of the debtor. Furthermore, the borrower must have:

i. Settled the total amount of due and payable interest;

ii. Settled all of the payments for which he is liable under the terms of the contract at the date of

the restructuring or renewal.

dd. The requirement that the borrower must have paid the total amount of the interest accrued at the date

of renewal or restructuring to consider that a loan remains current will be considered as fulfilled, when

after the interest accrued at the final cutoff date has been paid, the term elapsed between such date and

the restructuring or renewal does not exceed the lower of half of the payment period under way or 90

days.

ee. Current loans with periodic partial payments of principal and interest which are restructured or

renewed more than once may remain in current portfolio if there are elements to justify the payment

capacity of the debtor. It is specified that in the case of commercial loans, such elements must be duly

documented and placed in the loan file.

ff. If different loans granted by the same entity to the same borrower are consolidated in a restructuring or

renewal, each of the consolidated loans must be analyzed as if they were restructured or renewed

separately and, if as a result of such analysis it is concluded that one or more of such loans would have

been transferred to overdue portfolio due to the effect of such restructuring or renewal, then the total

balance of the consolidated loan must be transferred to overdue portfolio.

gg. With regard to presentation standards in the balance sheet and the statement of income, it is established

that:

i. Housing loans acquired from the INFONAVIT or the FOVISSSTE must be segregated inside

the current portfolio, into ordinary portfolio and extended portfolio.

ii. It is specified that the amount of loans for financial factoring, discount and credit rights

assignment transactions will be presented net of the respective appraisal percentage guarantee.

iii. Any commissions received before the accrual of the respective revenue will be presented under

the heading of “Deferred credits and advance collections”.

iv. The financial revenue accrued in the financial factoring, discount and credit rights assignment

transactions will be considered as interest income.

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hh. With regard to disclosure standards, new requirements are incorporated such as: i. Breakdown of the restricted current portfolio and unrestricted and overdue portfolio for the

media and residential portfolio, low income portfolio, remodeling or improvement secured by the housing subaccount and loans acquired from the INFONAVIT or the FOVISSSTE, segregated into ordinary portfolio and extended portfolio.

ii. Total amount and number of loans acquired from the INFONAVIT or the FOVISSSTE

transferred to overdue portfolio, as well as the total amount of loans that were not transferred to overdue portfolio, segregated into loans that the entity acquired from the INFONAVIT or the FOVISSSTE, in accordance with the respective REA or ROA payment modality, and loans granted to individuals for remodeling or improving the home for no speculative purposes, which are backed by the savings of the borrower’s housing subaccount.

iii. Principal characteristics of the loans acquired from the INFONAVIT or the FOVISSSTE,

describing at least those related to their classification as extended portfolio, ROA and REA, together with those related to the assignment of such credits.

iv. Description of the obligation and rights held by the INFONAVIT and FOVISSSTE in relation

to the portfolio acquired by the entity. v. Identification by type of loan for the medium and residential portfolio, low income portfolio,

remodeling or improvement guaranteed by the housing subaccount, and loans acquired from the INFONAVIT or FOVISSSTE of the balance of the overdue portfolio as of the date on which it was classified as such, in the following terms: from 1 to 180 calendar days, from 181 to 365 calendar days, from 366 calendar days to two years, and more than two years in overdue portfolio.

vi. Total amount of housing loans backed by the housing subaccount, broken down into current and

overdue portfolio and specifying the percentage which it represents of the total housing loans. vii. Total accumulated amount of the restructuring or renewal by type of loan, differentiating that

originated in the exercise of those consolidated loans transferred to overdue portfolio as of result of a restructuring or renewal, from those restructured loans to which the criteria for the transfer to overdue portfolio were not applied.

ii. It is established in Accounting Criterion B-7, Foreclosed assets, that in the case of assets whose

valuation to determine fair value may be made through an appraisal, the latter must comply with the requirements established by the Commission for providers of bank appraisal services.

jj. It is clarified in Accounting Criterion C-2, Stock market operations, that in the case of stock market instruments executed and recognized in the consolidated financial statement prior to January 1, 2009, it will not be necessary to reevaluate the transfer of recognized financial assets prior to such date.

In this regard, the principal effects that this exception might have on such financial statements should be disclosed in notes to the financial statements, as well as the effects of recognition of the adjustments for valuation of the profits on the remnant of the assignee (recognized in results or in stockholders’ equity) and of the asset or liability recognized for administration of transferred financial assets.

kk. The definition of “Agreement with Joint Control”, “Joint Control” is incorporated, and the definition of “Associated Company”, “Control” “Holding Company”, “Significant Influence”, “Related Parties” and “Subsidiary” is modified in Accounting Criterion C-3, Related parties.

ll. Individuals or business entities which, directly or indirectly, through one or more intermediaries exert significant influence on, are significantly influenced by, or are under significant influence of the entity, as well as agreements with joint control in which the entity participates, are now considered to be related parties.

mm. The disclosure requirements contained in Accounting Criterion C-3, Related parties, are extended to agreements with joint control.

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nn. As an amendment to Accounting Criterion C-4, Information by segments, the purchase and sale of foreign currency is incorporated within the segment of Treasury and investment banking operations.

oo. Different modifications are made to the presentation of the balance sheet to incorporate the opening of the current and overdue home loan portfolio in the following segments: medium and residential, low income, loans acquired from the INFONAVIT or FOVISSSTE, and remodeling and improvement with collateral granted by the development bank or public trusts.

pp. The requirement is established to present on the balance sheet as a liability under the heading “Inactive global deposits account”, the principal and interest on deposit instruments which do not have a date of maturity or, when they do, they are renewed automatically, as well as the transfers or expired or unclaimed investments referred to in article 61 of the Credit Institutions Law.

qq. A heading named “Re-measurements for defined benefits to employees” is added as part of earned capital on the balance sheet, as a result of the enactment of NIF D-3, Employee benefits.

rr. The heading “Collateral granted” is incorporated at the foot of the balance sheet within memorandum accounts.

ss. It is specified that insurance and bonding, technical assistance expenses, maintenance expenses, fees different from those paid to the IPAB and consumables and fixtures should be included in the statement of income.

tt. The statement of changes in stockholder’s equity should include re-measurements for defined benefits to employees as part of movements inherent to the recognition of comprehensive income, as a result of the enactment of NIF D-3, Employee benefits.

NIF issued by the CINIF applicable to the Institution New NIF D-3, Employee Benefits At January 2015, the CINIF issued several amendments to NIF D-3, Employee Benefits. These amendments came into effect from at January 1, 2016. The principal modifications derived from the application of this new NIF D-3 in the Financial Group’s financial information are as follows:

Discount rate for liabilities - Defined Benefits Obligation (OBD)

- The discount rate to calculate the OBD will be determined by taking the market rate of high-

quality corporate bonds, provided that there is a deep market for such bonds. Otherwise, the market rate of the bonds issued by the federal government must be taken.

Recognition of actuarial gains and losses

- The use of the broker is eliminated for the deferral of actuarial gains and losses. - The accumulated balance of retained earnings and accumulated losses as of December 31, 2015

will be recognized as part of stockholders’ equity and in liabilities as of January 1, 2016. - Any actuarial gains and losses generated as of January 1, 2016 will be treated as re-

measurements for defined benefits to employees, and will be recognized in stockholders’ equity and in liabilities.

Amortization of actuarial gains and losses

- The actuarial gains and losses recognized in stockholders’ equity must be recycled to results in

the Remaining Useful Life of the Plan.

Expected return on plan assets - The expected return on the plan assets will be estimated with the discount rate of the liabilities

instead of the expected rate of return for the fund.

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Due to the enactment of the NIF D-3, on December 31, 2015 the Commission issued different transitory articles to the “Resolution amending the General provisions applicable to credit institutions”, published in the Federal Official Gazette on November 9, 2015. These transitory articles establish that credit institutions may recognize the entire balance of plan amendments

(past service) and the accumulated balance of the plan’s gains and losses not recognized for entities which used the broker approach progressively at the latest on December 31 of each year. If the option is taking to progressively apply the aforementioned balances, the recognition of such balances should begin in the year 2016, recognizing 20% in that year and another 20% in each of the subsequent years,

until reaching 100% within a maximum term of five years. The re-measurements of gains and losses from the defined benefits plan which should be recognized at the end of each period, together with their respective recycling to results of the year, should be calculated on the total amount of the plan’s gains or losses; i.e., on the aggregate of the plan’s gains or losses, plus those not

recognized on the balance sheet of the institutions. Credit institutions which elect to apply this option must report their decision to the Commission at the latest by January 31, 2016. By the same token, if all or part of the remnant effect is recognized before the established deadlines, the Commission must be informed within the 30 calendar days following the date on which the respective accounting record is made. The entities may perform such recognition in advance, provided that at least 20% or the total remnant is recognized in the respective year. Credit institutions which applied any of the aforementioned options should disclose the adjustments derived from applying the option in question in the public financial reporting communications for the years 2016 and up to that in which the progressive recognition of the aforementioned effects is concluded. In this regard, the initial effect that the application of the NIF D-3 in subsequent years due to the accumulated balance of actuarial losses not recognized as of December 31, 2015 is $2,771. This balance will be recognized within Earned capital under the heading of “Re-measurements for employee defined benefits” as of the year 2016, recognizing 20% of the accumulated balance in such year and an additional 20% in each of the subsequent years until reaching 100% over a maximum five-year period. Furthermore, this accumulated balance of actuarial losses not recognized as of December 31, 2015 will be recycled to results during the Remaining Labor Life of the Plan, which fluctuates between 9.5 and 14 years depending on the respective benefit. NIF and INIF Enacted At December 31, 2015, the CINIF has issued the following NIFs and Interpretations to FRS (INIF) that could have an impact on the consolidated financial statements of the Institution: a. Effective as of January 1, 2016:

INIF 21, Recognition of payments for employee separation b. Effective as of January 1, 2018:

NIF C-2, Investment in financial instruments NIF C-3, Accounts receivable

NIF C-9, Provisions, contingencies and commitments NIF C-16, Impairment on financial instruments receivable NIF C-19, Financial instruments payable NIF C-20, Financial instruments receivable

NIF D-1, Revenue from contracts with customers

NIF D-2, Costs from contracts with customers

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Improvements to NIF 2016

Improvements to the NIF 2016 - The following improvements were issued, effective January 1, 2016, which

generate accounting changes:

NIF B-7, Business acquisitions - Clarifies that the acquisition and/or merger of entities under common

control, and the acquisition of noncontrolling equity or the sale without losing control of the subsidiary, are

outside the scope of this NIF, regardless of how the amount of the consideration was determined.

NIF C-1, Cash and cash equivalents and NIF B-2, Statement of cash flows - Modified to consider foreign

currency as cash and not as cash equivalents. Clarifies that both the initial and subsequent valuation of cash

equivalents must be at fair value.

Bulletin C-2, Financial instruments and Document of amendments to Bulletin C-2 -

i) The definition of financial instruments available for sale is modified to clarify that they are those in

which investment is made from time to time with the intention of trading them over the medium-term

prior to maturity, so as to obtain profits based on changes in market value, and not only through their

related returns.

ii) Criteria for classifying a financial instrument as available for sale is clarified to prohibit such

classification when i) the intention is to hold it for an indefinite period, ii) the entity is willing to sell

the financial instrument, iii) it has a sale or redemption option on the instrument, and iv) the issuer of

the instrument has the right to liquidate the financial instrument at an amount significantly lower than

its amortized cost.

iii) The concept of purchase expenses is eliminated and the definition of transaction costs is incorporated.

iv) The reversal of impairment losses from financial instruments held to maturity is allowed, in the net

income or loss for the period.

NIF C-7, Investments in associates, joint ventures and other permanent investments - Establishes that

contributions in kind should be recognized at the fair value that was negotiated between owners or

shareholders, unless they are the result of debt capitalization, in which case they should be recognized for the

capitalized amount.

Bulletin C-10, Financial derivatives and hedge transactions-

a. The method to be used to measure the effectiveness should be defined, which should be evaluated at

the beginning of the hedge, in the following periods and at the date of the financial statements.

b. Clarifies how to designate a primary position.

c. The accounting for the transaction costs of a financial derivative is modified to be recognized directly

in the net income or loss of the period at acquisition, and not deferred and amortized during its

effective term.

d. Clarifications are made on the recognition of embedded derivatives.

The following improvements were issued which do not generate accounting changes:

NIF C-19, Financial instruments payable (FIP) - Clarifications are made with regard to: i) the definition of

transaction costs, ii) when amortization of the transaction costs should be recalculated, iii) the entity should

demonstrate, as support for its accounting policy, that it complies with the conditions for designating a

financial liability at fair value through net income or loss, and iv) disclosing the gain or loss when an FIP is

derecognized and the fair values of significant long-term fixed-rate liabilities. Furthermore, an appendix is

incorporated as support in the determination of the effective interest rate.

122

NIF C-20, Financial instruments receivable - Changes are incorporated to clarify and explain various

concepts due to the issuance of the new NIF related to financial instruments and the final issuance of IFRS 9,

Financial Instruments. The most important of these include: transaction costs and related amortization,

effective interest rate, impairment, foreign-currency instruments, reclassification between fair value debt

instruments and financial instruments receivable, the value of money over time and disclosure of qualitative

and quantitative information.

At the date of issuance of these consolidated financial statements, the Entity has not completed its evaluation

of the potential effects of adopting these new standards on its financial information.

42. Reclassifications to the financial statements

The consolidated financial statements as of December 31, 2014, have been reclassified to conform to the

consolidated financial statements as of December 31, 2015.

These reclassifications are performed for the following headings: “Financial Margin” and the Consolidated

Statements of Cash Flows.

43. Authorization of the financial statements by the Commission

The accompanying consolidated financial statements as of December 31, 2015 and 2014 are subject to

examination by the Commission and could therefore be modified following this review.

44. Financial statements issuance authorization

These consolidated financial statements were approved by the Board of Directors and signed on its behalf by:

________________________________ __________________________________

Héctor Blas Grisi Checa Pedro José Moreno Cantalejo

Executive President and Chief Executive Vice president of Administration and Finances

________________________________ ________________________________

Emilio de Eusebio Saiz Juan Carlos García Contreras

Deputy General Director of Intervention

and Control Management

Executive Director of Accounting

________________________________

Juan Ramón Jiménez Lorenzo

Executive Director of Internal Audit

* * * * * *

Documents

Banco Santander (México), S.A., Institución de Banca ... · Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México and Subsidiaries