Santander Consumer Finance, S.A. and subsidiaries ... Santander Consumer Finance, S.A. and subsidiaries

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  • Santander Consumer Finance, S.A. and subsidiaries

    Independent auditor´s report on the consolidated annual accounts at December, 31 2018

  • PricewaterhouseCoopers Auditores, S.L., Torre PwC, Pº de la Castellana 259 B, 28046 Madrid, España

    Tel.: +34 915 684 400 / +34 902 021 111, Fax: +34 915 685 400, www.pwc.es 2 R. M. Madrid, hoja 87.250-1, folio 75, tomo 9.267, libro 8.054, sección 3ª Inscrita en el R.O.A.C. con el número S0242 - CIF: B-79 031290

    This version of our report is a free translation of the original, which was prepared in Spanish. All possible care

    has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes

    precedence over this translation.

    Independent auditor´s report on the consolidated annual accounts To the shareholders of Santander Consumer Finance, S.A.

    Report on the consolidated annual accounts

    Opinion We have audited the consolidated annual accounts of Santander Consumer Finance, S.A. (the Parent company) and its subsidiaries (the Group), which comprise the balance sheet as at December 31, 2018, and the income statement, statement of other comprehensive income, statement of changes in equity, cash flow statement and related notes, all consolidated, for the year then ended. In our opinion, the accompanying consolidated annual accounts present fairly, in all material respects, the equity and financial position of the Group as at December 31, 2018, as well as its financial performance and cash flows, all consolidated, for the year then ended, in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS-EU) and other provisions of the financial reporting framework applicable in Spain.

    Basis for opinion We conducted our audit in accordance with legislation governing the audit practice in Spain. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated annual accounts section of our report. We are independent of the Group in accordance with the ethical requirements, including those relating to independence, that are relevant to our audit of the consolidated annual accounts in Spain, in accordance with legislation governing the audit practice. In this regard, we have not rendered services other than those relating to the audit of the accounts, and situations or circumstances have not arisen that, in accordance with the provisions of the aforementioned legislation, have affected our necessary independence such that it has been compromised. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

    Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated annual accounts of the current period. These matters were addressed in the context of our audit of the consolidated annual accounts as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

  • Santander Consumer Finance, S.A. and subsidiaries

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    Key audit matter How our audit addressed the key audit matter

    Impairment of financial assets at amortised costs - loans and advances Estimating the credit impairment of financial assets at amortised cost - loans and advances - is one of the most significant and complex estimation exercises performed in preparing the accompanying 2018 consolidated annual accounts. International Financial Reporting Standard 9 (IFRS 9) took effect on 1 January 2018. Among other things, it changed the methodology for calculating impairment losses: the impairment model is now based on expected credit losses rather than incurred losses. Use of such models to determine expected credit loss entails a significant degree of judgement, specifically with respect to: • Classification of the various credit

    portfolios by risk and asset type. • Identification of impaired assets or assets

    presenting a significant increase in credit risk and sorting them into stages.

    • The use of concepts such as macroeconomic

    scenarios, expected lifetime and segmentation criteria.

    • The construction of parameters for those

    models such as the probability of default (PD) and loss given default (LGD).

    • The performance of back-testing and

    monitoring with respect to those models' key parameters.

    The Group's business is concentrated on the provision of vehicle and consumer finance in nine key markets (Germany, Scandinavia [Norway, Sweden, Denmark and Finland], Spain, France, Italy and Austria). Against this backdrop, the Group has developed a general framework for its internal expected loss models which, nevertheless, takes into account the specific characteristics of each of its markets. Its internal models enable it to estimate loan-loss impairment provisions collectively and for significant individual exposures.

    Our work in the area of estimating the impairment of loans and advances on account of credit risk focused on analysing, assessing and testing the internal controls and performing tests of details with respect to the provisions estimated collectively and individually. We also analysed the impact of the first-time application of IFRS 9. As for the internal controls, we focused on the design and effectiveness of the controls over the following processes: • The calculation and recalibration

    methodologies and the back-testing and monitoring processes followed by Management.

    • Regulatory compliance and operating as

    intended of Management-approved internal models .

    • The reliability of the sources of the data used

    for calculation purposes and the appropriateness of the models in light of the circumstances.

    • The process for periodically reviewing

    borrowers to check their classification. • The process for reviewing the calculations

    obtained from the models and for the main portfolios.

    In addition, we carried out the following tests of details: • We checked, for the main models, the

    following: i) the calculation and segmentation methods; ii) the methodology for estimating expected loss parameters; iii) the methodology used to generate macroeconomic scenarios; iv) the data used to calculate and generate them; v) the criteria used to test for a 'significant increase' in credit risk and to classify loans by stages.

    • We checked the impairment loss calculations

    for the main loan portfolios.

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    Key audit matter How our audit addressed the key audit matter

    Refer to Notes 1.b, 2 and 10 of the accompanying 2018 consolidated annual accounts.

    • We took a sample of individual borrower case files to check they were properly classified and that their discounted cash flows and any corresponding impairment losses had been duly recognised.

    Any differences encountered as part of the above- listed tests fell within a reasonable range.

    Goodwill testing To test its goodwill for impairment, the Group estimates the recoverable amount of each of the cash-generating units (CGUs) to which it has allocated goodwill annually, using market references (multiples) and internal estimates and valuations performed by independent experts. Management estimates the recoverable amounts of its most significant CGUs by calculating their value in use, discounting their projected cash flows to this end. Those estimates are intrinsically subject to uncertainty and involve a significant element of judgement as they are based on assumptions regarding aspects such as discount rates, earnings projections and the long-term growth rates. The estimates are sensitive to the inputs and assumptions used which, by their very nature, entail the risk of incorrect assessment. Due to their relevance for the Group, Management closely monitors the goodwill deriving from the businesses in Germany, Austria and Scandinavia (Norway, Sweden and Denmark). Refer to Notes 2 and 14 of the accompanying consolidated annual accounts.

    We documented, with the assistance of our valuation experts, our understanding and review of the estimation exercise undertaken by Management. As for the internal controls, we focused on the design and effectiveness of the controls over the following areas: • The criteria used to define the Group's CGUs.

    • The methodology used by Management to estimate the impairment of goodwill, including the controls in place for supervising the process and the approvals involved.

    • The budgeting process underpinning the earnings projections used in the discounted cash flow models.

    • We checked Management's ability to generate reliable estimates by checking prior-year forecasts and impairment assessments against actual outcomes.

    • We reviewed the annual valuation reports compiled by the Group and by external experts in connection with the goodwill impairment testing process.

    In parallel, we also conducted tests to cross-check the discounted cash flow models used by the Group for goodwill impairment testing purposes, factoring in market practice and sector-specific e