Grupo Financiero Santander, S.A.B. de C.V. and Subsidiaries (formerly Grupo Financiero Santander Serfin S.A. de C.V. and Subsidiaries) (A Subsidiary of Banco Santander Central Hispano, S.A.) Consolidated Financial Statements for the Years Ended December 31, 2006 and 2005, and Independent Auditors’ Report Dated January 17, 2007

Grupo Financiero Santander, S.A.B. de C.V. and Subsidiaries (formerly Grupo Financiero Santander Serfin, S.A. de C.V. and Subsidiaries) Independent Auditors’ Report and Consolidated Financial Statements 2006 and 2005 Table of contents Page Independent Auditors’ Report 1 Consolidated Balance Sheets 2 Consolidated Statements of Income 3 Consolidated Statements of Changes in Stockholders’ Equity 4 Consolidated Statements of Changes in Financial Position 5 Notes to Consolidated Financial Statements 7

Independent Auditors’ Report To the Board of Directors and Stockholders of Grupo Financiero Santander, S.A.B. de C.V. (formely Grupo Financiero Santander Serfin, S.A. de C.V.) We have audited the accompanying consolidated balance sheets of Grupo Financiero Santander, S.A.B. de C.V. and subsidiaries (formerly Grupo Financiero Santander Serfin, S.A. de C.V. and Subsidiaries) (the “Financial Group”) as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity and changes in financial position for the years then ended, all expressed in millions of Mexican pesos of purchasing power of December 31, 2006. These financial statements are the responsibility of the Financial Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and that they are prepared in conformity with the accounting practices prescribed by the National Banking and Securities Commission (the “Commission”). An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting practices used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As explained in Notes 1, 3 and 4 to the accompanying consolidated financial statements, the operations of the Financial Group and its financial reporting requirements are regulated by the Commission through the issuance of accounting circulars and general and specific purpose official letters that regulate the recording of certain transactions and other applicable laws. Note 3 describes the principal differences between the accounting practices prescribed by the Commission and the Financial Reporting Standards applicable in Mexico, commonly used in the preparation of financial statements for other types of unregulated entities in Mexico, as well as those practices derived from general authorizations issued and specific authorizations granted to the Financial Group by the Commission and its principal subsidiaries for the recording of certain transactions. The main changes in accounting practices established by the Commission, which were implemented as of January 1, 2007, are also described. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Grupo Financiero Santander, S.A.B. de C.V. and subsidiaries (formerly Grupo Financiero Santander Serfin, S.A. de C.V. and Subsidiaries), as of December 31, 2006 and 2005, and the results of their operations, changes in their stockholders’ equity and changes in their financial position for the years then ended in conformity with the accounting practices prescribed by the Commission. This auditors’ report and consolidated financial statements have been translated into English for the convenience of users. Galaz, Yamazaki, Ruiz Urquiza, S. C. Member of Deloitte Touche Tohmatsu C.P.C. Ricardo A. García Chagoyán January 17, 2007

Grupo Financiero Santander, S.A.B. de C.V. and Subsidiaries (Formerly Grupo Financiero Santander Serfin, S.A. de C.V. and Subsidiaries)

Consolidated Balance Sheets As of December 31, 2006 and 2005 (In millions of Mexican pesos of purchasing power of December 31, 2006) Assets 2006 2005 Funds available $ 81,674 $ 74,873 Investment in securities:

Trading securities 36,731 33,733 Securities available for sale 308 54,625 Securities held to maturity 5,227 6,212

42,266 94,570 Securities and derivative transactions:

Debit balances under repurchase and resale agreements 1,974 1,049 Securities received in loan transactions 479 102 Derivative financial instrument transactions 48,028 25,737

50,481 26,888 Current loan portfolio:

Commercial loans 80,641 55,543 Financial entities loans 2,817 1,393 Consumer loans 50,863 29,360 Mortgage loans 16,149 12,753 Government loans 33,736 48,549 FOBAPROA or IPAB loans 22,009 23,553

Total current loan portfolio 206,215 171,151 Past-due loan portfolio:

Commercial loans 280 549 Consumer loans 1,814 761 Mortgage loans 248 279 Other loans 2 2

Total past-due portfolio 2,344 1,591 Total loan portfolio 208,559 172,742

Allowance for loan losses (4,255) (3,518)

Loan portfolio (net) 204,304 169,224 Other receivables (net) 18,069 14,567 Foreclosed assets (net) 142 113 Properties, furniture and fixtures (net) 5,014 4,789 Investments in shares 1,624 1,586 Deferred taxes (net) - 933 Other assets:

Deferred charges and intangibles 1,806 1,449 Goodwill 781 803

2,587 2,252

Total assets $ 406,161 $ 389,795

Liabilities 2006 2005 Deposits:

Demand deposits $ 104,403 $ 90,740 Time deposits -

General public 99,230 116,427 Money market 37,796 41,006 241,429 248,173

Bank and other loans:

Demand loans 5,495 4,658 Short-term loans 2,485 19,935 Long-term loans 2,278 3,124

10,258 27,717 Securities and derivatives transactions:

Credit balances under repurchase and resale agreements 2,764 1,537 Securities delivered under loan transactions 12,649 11,493 Derivative financial instruments transactions 45,886 28,139

61,299 41,169 Other payables:

Income taxes and employee profit sharing payables 391 227 Sundry creditors and other payables 34,825 25,377

35,216 25,604 Subordinated debentures 3,280 3,355 Deferred taxes (net) 2,568 -

Total liabilities 354,050 346,018

Stockholders’ equity Paid-in capital:

Capital stock 29,124 29,124 Additional paid-in capital 1,602 1,602

30,726 30,726 Other capital:

Capital reserves 101 101 Retained earnings 16,417 9,997 Gain from valuation of securities available for sale, net 218 1,053 Insufficiency in restated stockholders’ equity (4,849) (4,849) Loss from holding nonmonetary assets due to the valuation of

investments in shares (113) (112) Adjustment to labor obligations (128) (181) Net income 9,728 7,033

21,374 13,042 Minority interest 11 9

Total stockholders’ equity 52,111 43,777

Total liabilities and stockholders’ equity $ 406,161 $ 389,795

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Memorandum accounts Transactions on behalf of third parties 2006 2005 Customer current accounts:

Customer cash balances $ 49 $ 35 Customer transaction settlements (9) (130)

40 (95) Customer securities:

Customer securities held in custody 174,695 159,039 Securities and notes held in guarantee 1,767 1,396

176,462 160,435 Transactions on behalf of customers:

Customer repurchase and resale transactions 21,516 27,231 Customer securities under loan transactions 16 - Customer purchase of options 961 248 Customer purchase option transactions 366 258

22,859 27,737

Total transactions on behalf of third parties $ 199,361 $ 188,077

Financial Group’s own transactions 2006 2005 Financial Group’s control accounts:

Irrevocable lines of credits granted $ 11,125 $ 8,536 Goods in trust or mandate 150,460 103,610 Goods in custody or under administration 1,902,405 1,541,632 FOBAPROA or IPAB transactions – committed amounts 8,314 20,107 Certificates of deposits outstanding 20 21 Securities delivered in custody 27,252 28,366 Government securities in custody 434 101 Securities delivered in guarantee 120 4 Amounts owed to the contingencies fund 29 27

Other contingent obligations 11,008 499 2,111,167 1,702,903

Repurchase and resale agreements: Securities receivable under resale agreements 245,594 216,747 Less: Resale agreements 246,762 217,277

Net (1,168) (530)

Repurchase agreements 12,677 8,152 Securities deliverable under repurchase agreements 12,299 8,110

Net 378 42

Total Financial Group’s own transactions $ 2,110,377 $ 1,702,415 The accompanying notes are part of these consolidated financial statements.

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Grupo Financiero Santander, S.A.B. de C.V. and subsidiaries (Formerly Grupo Financiero Santander Serfin, S.A. de C.V. and Subsidiaries)

Consolidated Statements of Income For the years ended December 31, 2006 and 2005 (In millions of Mexican pesos of purchasing power of December 31, 2006) 2006 2005 Interest income $ 51,902 $ 50,645 Interest expense (30,682) (36,040) Monetary position loss, net (1,456) (997)

Financial margin 19,764 13,608 Provision for loan losses (2,846) (399) Financial margin after provision for loan losses 16,918 13,209 Commission and fee income 11,051 9,667 Commission and fee expense (3,713) (2,678) Intermediation income 4,168 1,320 11,506 8,309

Total operating revenues 28,424 21,518 Administrative and promotional expenses (14,012) (12,550)

Operating income 14,412 8,968 Other income 2,390 1,852 Other expenses (3,214) (2,122)

Income before current and deferred income taxes and employee profit sharing 13,588 8,698

Current income taxes and employee profit sharing (562) (609) Deferred income taxes and employee profit sharing (3,513) (1,177)

Income before equity in results of subsidiaries and associated companies 9,513 6,912

Equity in results of subsidiaries and associated companies 217 122

Income from continuing operations 9,730 7,034 Minority interest (2) (1)

Net income $ 9,728 $ 7,033 The accompanying notes are part of these consolidated financial statements.

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Grupo Financiero Santander, S.A.B. de C.V. and subsidiaries (Formerly Grupo Financiero Santander Serfin, S.A. de C.V. and Subsidiaries) Consolidated Statements of Changes in Stockholders’ Equity For the years ended December 31, 2006 and 2005 (In millions of Mexican pesos of purchasing power of December 31, 2006)

Paid-in Capital Other Capital

Results from

Holding

Gain (Loss) Nonmonetary

Assets

Prepaid

from Valuation Insufficiency Due to the

Valuation of Adjustments dividends Additional of Securities in Restated to employee against Total Capital stock Paid-in Total Retained Available for Retained Stockholders’ Investments ́ Retirement retirement Net retained Minority Historical Restatement Capital Earnings Reserves earnings Sale, net Equity Assets obligations income earnings interest equity

Balances, December 31, 2004 $ 19,657 $ 9,467 $ 29,124 $ 1,604 $ 101 $ 5,730 $ (745) $ (4,849) $ (75) $ (173) $ 6,441 $ (1,620) $ 7 $ 35,545

Transfer of prior year’s result - - - - - 4,821 - - - - (6,441) 1,620 - - Cost of issuance of common stock - - - (2) - - - - - - - - - (2) Dividends declared - - - - - (1,065) - - - - - - - (1,065)

Total entries approved by stockholders - - - (2) - 3,756 - - - - (6,441) 1,620 - (1,067)

Comprehensive income- Loss from valuation of securities available for sale, net - - - - - - 1,798 - - - - - - 1,798 Recoveries of credit reserves previously applied

against retained earnings - - - - - 128 - - - - - - - 128 Loss from holding nonmonetary assets of the year - - - - - - - - (37) - - - - (37) Deferred taxes recorded against retained earnings - - - - - 383 - - - - - - - 383 Adjustments for employee retirement obligations - - - - - - - - - (8) - - - (8) Net Income - - - - - - - - - - 7,033 - 1 7,034 Minority interest - - - - - - - - - - - - 1 1

Total comprehensive result - - - - - 511 1,798 - (37) (8) 7,033 - 2 9,299 Balances, December 31, 2005 19,657 9,467 29,124 1,602 101 9,997 1,053 (4,849) (112) (181) 7,033 - 9 43,777

Transfer of prior year’s result - - - - - 7,033 - - - - (7,033) - - - Dividends declared - - - - - (755) - - - - - - - (755)

Total entries approved by the stockholders - - - - - 6,278 - - - - (7,033) - - (755)

Comprehensive income- Gain from valuation of securities available for sale,

net - - - - - - (835) - - - - - - (835) Recoveries of credit reserves and of securities

previously applied against retained earnings - - - - - 142 - - - - - - - 142 Loss from holding nonmonetary assets in the year - - - - - - - - (1) - - - - (1) Adjustments for employee retirement obligations - - - - - - - - - 53 - - - 53 Net income - - - - - - - - - - 9,728 - 2 9,730

Total comprehensive result - - - - - 142 (835) - (1) 53 9,728 - 2 9,089

Balances, December 31, 2006 $ 19,657 $ 9,467 $ 29,124 $ 1,602 $ 101 $ 16,417 $ 218 $ (4,849) $ (113) $ (128) $ 9,728 $ - $ 11 $ 52,111 The accompanying notes are part of these consolidated financial statements.

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Grupo Financiero Santander, S.A.B. de C.V. and subsidiaries (Formerly Grupo Financiero Santander Serfin, S.A. de C.V. and Subsidiaries)

Consolidated Statements of Changes in Financial Position For the years ended December 31, 2006 and 2005 (In millions of Mexican pesos of purchasing power of December 31, 2006) 2006 2005

Operating activities: Results from continuing operations $ 9,730 $ 7,034 Add (less) items that did not require (generate) resources:

Depreciation and amortization 988 986 Provision for loan losses 2,846 399 Losses from valuation of securities to market (3,759) (1,170) Deferred income taxes 3,513 1,177 Equity in the results of subsidiaries and associated companies (217) (122) Provision for foreclosed assets 4 5 Release for special cetes reserves (88) (93)

13,017 8,216 (Increase) decrease in operating assets and liabilities:

Investments in securities 52,432 1,228 Securities and derivatives transactions, net (578) 8,377 Loan portfolio (net) (37,926) (15,219) Other accounts receivable (net) (3,501) (6,378) Deferred taxes (net) (11) 106 Deposits (6,745) 31,289 Bank and other loans (17,458) (26,494) Subordinated debentures (75) 2,155 Other payables 9,612 10,215 Application of labor obligations to stockholders' equity 53 (8)

Net resources generated by operating activities 8,820 13,487

Financing activities:

Dividends declared (755) (1,065) Cost applied to additional paid-in capital - (2) Recoveries of restructuring reserves 142 128 Deferred taxes recorded in retained earnings - 383 Minority interest 2 2

Net resources used in financing activities (611) (554)

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2006 2005 Investing activities:

Acquisition of properties, furniture and fixtures (net) (715) (323) Foreclosed assets (net) (36) 25 Investments in shares 243 90 Goodwill (45) - Other deferred assets, charges and intangibles (855) (443)

Net resources used in investing activities (1,408) (651) Net increase in funds available 6,801 12,282 Funds available at beginning of year 74,873 62,591 Funds available at end of year $ 81,674 $ 74,873

The accompanying notes are part of these consolidated financial statements.

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Grupo Financiero Santander, S.A.B. de C.V. and subsidiaries (Formerly Grupo Financiero Santander Serfin, S.A. de C.V. and Subsidiaries)

Notes to Consolidated Financial Statements For the years ended December 31, 2006 and 2005 (In millions of Mexican pesos of purchasing power of December 31, 2006) 1 Activities and regulatory environment

Grupo Financiero Santander, S.A.B. de C.V. (formerly Grupo Financiero Santander Serfin, S.A. de C.V.) (the “Group”) is a subsidiary of Banco Santander Central Hispano (BSCH) and is authorized by the Treasury Department (SHCP) to operate as a financial group under the form and terms established by the Financial Group Law (“Law”), subject to the supervision and monitoring of the National Banking and Securities Commission (the “Commission”) and Banco de México. The Group’s main activities include the acquisition of financial sector entity shares and supervising their activities, as defined in the above-mentioned Law. The Group and its subsidiaries (collectively the “Financial Group”) are regulated, depending on their activities, by the Commission, the National Insurance and Bonding Commission, the National Retirement Savings Systems Commission (CONSAR), Banco de México and other applicable laws. The main activity of the subsidiaries is to carry out financial transactions that include the rendering of full-banking services, stock exchange intermediation, management of retirement funds, purchase and sale of uncollected invoices and notes, rendering of general warehousing services (which are operations currently suspended and are in liquidation) and providing life and casualty insurance. Per legal requirements, the Group has unlimited liability for the obligations assumed and losses incurred by each of its subsidiaries. At the Stockholders' Extraordinary General Meeting of Grupo Financiero Santander Serfin, S.A. de C.V. dated February 23, 2006, the stockholders resolved to change the corporate denomination of the entity to Grupo Financiero Santander, S.A. de C.V. Similarly, at the Stockholders' Extraordinary Meeting of August 7, 2006, the Group resolved to amend its corporate bylaws to adapt them to the amendments of the Stock Market Law, under which the Group became a Public Stock Company with Variable Capital denominated Grupo Financiero Santander, S.A.B. de C.V. and Subsidiaries.

2 Basis of presentation Explanation for translation into English - The accompanying consolidated financial statements have been translated from Spanish into English for use outside of Mexico. These consolidated financial statements are presented on the basis of accounting practices prescribed by the Commission. Certain accounting practices applied by the Financial Group may not conform to accounting principles generally accepted in the country of use.

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3 Principal differences with Financial Reporting Standards applicable in Mexico New financial reporting standards - As of June 1, 2004, the function of establishing and issuing financial reporting standards applicable in Mexico (identified as “NIF(s)”) became the responsibility of the Mexican Board for Research and Development of Financial Reporting Standards (“CINIF”). CINIF decided to rename the accounting principles generally accepted in Mexico (MEX GAAP), previously issued by the Mexican Institute of Public Accountants (“IMCP”), as Mexican Financial Reporting Standards. As of December 31, 2005, eight Series A standards had been issued (NIF A-1 to NIF A-8), representing the Conceptual Framework, intended to serve as the supporting rationale for the development of such standards, and as a reference to resolve issues arising in practice; NIF B-1, Accounting Changes and Correction of Errors, was also issued for other unregulated entities as of January 1, 2006. The consolidated financial statements have been prepared in conformity with the accounting practices prescribed by the Commission, which, in the following instances, differ from NIF, commonly applied in the preparation of financial statements for other type of unregulated entities: – Provisions for credit risks in addition to those required by the Commission may not be canceled

without the express authorization of the Commission, for which reason they should not be credited to results of the year in which such excesses are identified but rather until such authorization is granted.

– Non-collateralized repurchase/resale agreements are recorded as purchase-sale transactions based on

their form rather than their substance and the present value of the price thereof at maturity is reflected in the statement of income, instead of recording the agreed-upon premium on a straight-line basis.

– Sundry debts that are not recovered within 60 or 90 days, depending on their nature, are charged to the

consolidated statements of income, regardless of whether they may be recovered by the Financial Group.

– The revenues of Santander, S.A. de C.V., Afore (Afore) from commissions on received funds and

balances of accounts and administrative services of the concentration account are recorded in the consolidated statements of income when collected, rather than when earned.

– The valuation and recording of the reserve established in March 2000 for long-term Special CETES

denominated in UDIs is not in conformity with NIF due to the manner of its determination. As of December 31, 2006 and 2005, this reserve is $668 and $785 ($752 at face value), respectively. A revenue of $88 and $93, was recorded in the consolidated statements of income for the cancellation of such reserve, as of December 31, 2006 and 2005, respectively, as the Special CETES denominated in UDIs in the “Other income” account as amounts are collected from Banco de México.

– The Financial Group’s consolidated financial statements include the financial statements of

subsidiaries belonging to the financial sector and those of the subsidiaries that render complementary services, excluding the insurance company of the Financial Group. The NIFs establish that all subsidiaries where control is held should be consolidated, regardless of the sector to which they belong.

– Due to the Commission’s authorization through official letter No. 601-I-DGSIF “C”-38625 issued in

March 2001, as of December 31, 2006 and 2005 provisions and reserves resulting from the Financial Group’s restructuring process in addition to those required by the Commission are recorded for the amounts of $761 and $895, respectively, of which $568 and $660, respectively, refer to reserves in excess of the minimum reserves required by the Commission, which were provisioned in 2001 against retained earnings, based on the authorization granted by the Commission. Furthermore, as part of the authorization issued by the Commission, it is established that any recoveries of loan portfolio are recorded as a credit to retained earnings instead of crediting the income statement. As of December 31, 2006 and 2005, the Financial Group’s subsidiaries have recovered $142 and $128, respectively, and certain amounts derived from this reserve have been applied to the portfolio.

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– Commissions on granting credits and commissions on rendering services are recorded in the income statement when collected, rather than when earned.

– As of January 1, 2005, when the provisions of Bulletin B-7 “Business acquisitions” (“B-7”) of the NIF

went into effect, the following differences, among others, exist between the accounting criteria of the Commission and NIF: a) Goodwill is no longer subject to amortization as established in the accounting criteria of the Commission, but is subject to annual impairment testing of its value, b) the excess payment above book value for the acquisition of the minority interest or the excess payment above the book value for the acquisition of shares between entities under common control, is no longer recognized as goodwill, as established in the accounting criteria of the Commission, but such differential is applied to stockholders’ equity (accumulated results and contributed capital).

– As of January 1, 2005, when the provisions of Bulletin C-10 “Derivative financial instruments and

hedging operations” of NIFs went into effect, the following differences, among others, exist between the accounting criteria of the Commission and NIFs: a) In accordance with NIFs, derivative financial instruments are recorded based on fair value, whatever their purpose. In accordance with the accounting criteria of the Commission, derivative financial instruments acquired for hedging purposes are recorded under the same treatment for the primary position being hedged (based on that accrued or fair value), b) the derivative financial instrument used as a hedge should not be presented (offset) with the primary position being hedged, as established in the accounting criteria of the Commission, but should be presented separately as a financial derivative hedging instrument in accordance with NIFs, c) in conformity with NIFs, specific rules are established for the identification of implicit derivative contracts, where the financial risks should be isolated from the primary contract, such as contracts denominated in a functional currency different from that of the counterparts, which is not established in the accounting criteria of the Commission.

– Contribution or margin accounts handled (delivered and received) when trading derivative financial

instruments listed in regular markets (stock exchanges) and outside such markets, are recorded under the heading of “Funds available” and “Sundry creditors and other accounts payable”, respectively, instead of presenting them under the heading of “Operations with derivative financial instruments”, as established in NIFs.

– In accordance with NIFs, transfers from and to financial instruments classified as trading to other

categories is not permitted, but for purposes of the accounting criteria of the Commission, this would be permitted with prior authorization of such Commission.

– Bulletin C-15 “Impairment in the value of long-lived assets and their disposal” of NIFs, establishes the

general criteria for the determination, presentation and disclosure of losses due to the impairment of long-lived assets, whether tangible or intangible, including goodwill. Until December 31, 2006, the accounting treatments established by the Commission did not include evaluating the impairment of long-lived assets.

– Bulletin C-12 “Financial instruments with characteristics of debt, equity or a combination of both” of

NIFs, establishes the rules for classifying and valuing the components of liabilities and equity of the combined instruments in the initial recognition, as well as the rules for their disclosure. Until December 31, 2006, the accounting treatment established by the Commission did not include the aforementioned rules.

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4 Significant accounting policies The significant accounting policies of the Financial Group are in conformity with practices prescribed by the Commission’s accounting circulars, and other general and specific purpose official letters issued for such purposes, which require management to make certain estimates and use certain assumptions to determine the valuation of certain items included in the consolidated financial statements and make the required disclosures therein. While the estimates and assumptions used may differ from their final effect, management believes that the estimates and assumptions were adequate under current circumstances. In the absence of a specific treatment established in the accounting regulations issued by the Commission, first, NIFs will be applied, followed by, on a supplemental basis, the Normas Internacionales de Información Financiera (NIIF) approved and issued by the International Accounting Standards Board (“IASB”), and the definitive Generally Accepted Accounting Principles applicable in the United States of America (US GAAP). Changes in accounting policies and estimates- Changes in accounting policies- New policies applicable in 2007: On September 15, the Federal Official Gazette published modifications or changes in the accounting practices established by the Commission for credit institutions, which will go into effect as of January 1, 2007. The significant changes or modifications are those mentioned below: – The following specific standards are added, contained in the bulletins issued by the CINIF, which are

described below, or in any NIF which substitute or modify them: a) B-1 “Accounting changes and correction of errors”, b) B-7 “Business acquisitions”, c) C-10 “Derivative financial instruments and hedge transactions” d) C-15 “Impairment in the value of long-lived assets and their disposal” and e) D-5 “Leasing”.

– All of the subsidiaries under the control of holding companies may consolidate for tax purposes. The

restriction on consolidating subsidiaries belonging to the financial sector is eliminated. – Monetary position result will be determined based on opening balances, not average balances. – Foreclosed assets must be considered as nonmonetary assets, instead of monetary assets. – Cash dividends on share certificates will be recognized in results of the year in the same period in

which the fair value of such instruments is affected, as a result of the coupon cut off. – Transfers from or to the category of trading securities are eliminated, leaving only the possibility of

making transfers of securities from the category of held to maturity to that of available for sale. – The possibility of creating estimates for the drop in value of trading securities and securities available

for sale is eliminated, leaving the mechanism established only for those held to maturity. – With regard to repurchase agreements, it is established that all "Instruments subject matter of the

transaction" may be repurchased or resold; this refers to those securities which can be traded or those which fulfill the function of guaranteeing the payment of the considerations agreed. The restrictions placed on repurchasing or reselling trading securities only is eliminated.

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– Hedge derivatives are valued at market and the effect is recognized depending on the type of accounting hedge, as follows:

a. If they are fair value hedges, the primary position covered and the derivative hedge instrument

are valued at market, with the net effect recorded in results of the period. b. If they are cash flow hedges, the derivative hedge instrument is valued at market and the

effective part of the hedge is recorded within the comprehensive income account in stockholders' equity and the ineffective part is recorded in results for the year.

– The commissions collected for the official granting of credit will be recorded as a deferred credit, and

amortized as interest income under the straight-line method over the credit term. Any other kind of commission will be recognized on the date that is generated, under the heading of commissions and fees collected.

– With regard to the allowance for loan losses, additional allowances established by the Commission are

permitted to cover risks that are not regulated under the different classification methodologies of the loan portfolio.

– Recoveries of loans that were previously written off will be recorded in results of the year under the

heading of other proceeds; up to December 31, 2006, they were applied against reserves. – The excess of credit reserves determined in the loan portfolio and the additional reserves authorized

may be cancelled against results of the year (quarter), in compliance with the procedures established by the Commission.

– The commissions collected for granting third-party security will be presented under the heading of

commissions and fees collected; previously, they were presented under the heading of other income. The management of the Financial Group is currently analyzing the effects of these changes. Basis for consolidation - The accompanying consolidated financial statements include those of the Group and its subsidiaries mentioned below. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated subsidiaries and the Group’s equity percentage are as follows:

Equity Percentage Banco Santander , S.A. and subsidiaries (the Bank) 99.99% Casa de Bolsa Santander, S.A. de C.V. and subsidiaries

(the Brokerage House) 99.97% Gestión Santander, S.A. de C.V. (the Agent) 99.99% Almacenadora Serfin, S.A. de C.V. 98.71%

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At December 31, 2006 and 2005, Almacenadora Serfin, S.A. de C.V. is still in the process of liquidation. At the Extraordinary General Meetings of the Stockholders of Banco Santander Mexicano, S.A., Institución de Banca Múltiple, Grupo Financiero Santander Serfin (currently Banco Santander Serfin S.A) (the Bank), Banca Serfin, S.A., Institución de Banca Múltiple, Grupo Financiero Santander Serfin (Banca Serfin), Factoring Santander Serfin, S.A. de C.V., Grupo Financiero Santander Serfin (Factoring) and Fonlyser, S.A. de C.V. (Fonlyser), of November 29, 2004, the merger of the aforementioned entities based on figures at December 31, 2004, was authorized, whereby the Bank will be the absorbing the company and Banca Serfin, Factoring and Fonlyser will be the absorbed companies. The merger agreement between Banco Santander and Banca Serfin, Factoring and Fonlyser was executed on November 29, 2004, establishing that the merger would go into effect for the parties involved as of December 31, 2004. For accounting and tax purposes, the merger took effect as of January 1, 2005. Recognition of the effects of inflation in financial information - The Financial Group restates its consolidated financial statements in terms of the purchasing power of the currency at year-end. Accordingly, the consolidated financial statements of the prior year have been restated in terms of Mexican pesos of the latest period. The prior year amounts presented herein differ from those originally reported in terms of Mexican pesos of the respective year. Consequently, all consolidated financial statement amounts are comparable, both for the current and the prior year, because all are stated in terms of Mexican pesos of the same purchasing power. Funds available - Funds available are stated at face value. Foreign currencies are stated at fair value based on year-end exchange rates. When foreign currencies are acquired and their settlement is agreed to within a maximum term of two banking days following the formalization of the purchase-sale transaction, the currencies are recorded as restricted funds, but when foreign currencies are sold they are recorded as a credit to funds available. For sales, the offsetting entry is recorded in a debit balance settlement account, while purchases are recorded in a credit balance settlement account. For the purposes of presentation in the financial information, the settlement accounts receivable and payable for foreign exchange are offset based on the respective contract and term involved. Trading securities - Trading securities represent debt instruments and equity securities owned by the Financial Group or delivered in pledge, intended for sale, valued at fair value, which is determined by the price vendor contracted by the Financial Group, in conformity with the guidelines of the Commission. The cost of these securities is determined using the average cost method. The difference between the cost of the investments in debt and equity securities and their fair value is recorded in the statement of income. The effects of valuation will be treated as unrealized and, therefore, cannot be distributed to stockholders until the securities are sold. This heading records “Value date transactions”, which refer to purchase and sale transactions of unsettled, assigned securities, which are valued and recorded as trading securities, recording the receipt and expense (debit or credit balance) of the securities subject to the transaction when they are agreed, against the respective debit or credit settlement account. Securities available for sale - These securities are represented by debt instruments and equity securities, which are acquired for purposes other than trading, or securities held to maturity, since they are intended to be traded in the future but prior to their maturity.

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The Financial Group determines the increase or decrease resulting from the valuation of securities at their net realizable value using restated prices for valuation purposes provided by the price vendor, who uses different market factors for such determination. Interest on debt instruments is recorded based either on the imputed interest method or the straight-line method, as applicable, depending on the nature of the instrument. The yields are recognized in the statement of income. The unrealized gain or loss from the valuation provided by the price vendor and the gain or loss on monetary position of the unrealized gain or loss from the valuation of these securities, respectively, are recorded in stockholders’ equity under “Gain (loss) from valuation of securities available for sale”. Securities held to maturity - Securities held to maturity consist of debt securities whose payments can be determined and with known maturities exceeding 90 days, which are acquired to be held to maturity. They are initially recorded at acquisition cost and include accrued interest. Accrued interest is recorded in the statement of income using the straight-line method, based on the type of instrument. No transfer into or out of this classification may be made without the Commission’s specific authorization. This line item includes unlisted equity securities, valued at the lower of the equity method or restated cost; write-downs may be made based on management estimates. Securities deliverable under loan transactions - Securities loans consist of transferring ownership of the securities from the lender to the borrower, receiving as consideration a premium and other securities of the same kind or their equivalent in cash. In this type of transaction, the lender requests a guarantee from the borrower, consisting of cash, securities or letters of credit, with which the borrower guarantees that the borrowed securities will be returned to the lender. On the date the securities are borrowed, the Financial Group records the incoming securities at the agreed price, as well as a liability for the loan, which represents the obligation to return the securities or pay their equivalent in cash. When securities are loaned, the premium is recognized as a deferred credit, recording an account receivable or a cash inflow; when securities are borrowed, the premium is recognized as a deferred charge, recording an account payable or a cash outflow. The pledge agreed for the contracting security is recorded as a restricted asset. Repurchase and resale agreements - In the repurchase and resale agreements executed by the Financial Group, the parties agree to temporarily transfer credit instruments specifically related to the money market, authorized for such purpose. The price is the collection or payment of a premium. The results of these transactions consist of collected or paid premiums and the gain or loss on the purchase-sale of the underlying securities. Securities received or delivered under repurchase and resale agreements are recorded at their fair value, as determined by the price vendor contracted by the Financial Group, in conformity with the guidelines of the Commission’s respective circular. The unrealized gain or loss from the recording of the securities at fair value received or delivered under repurchase and resale agreements is recorded in the consolidated statements of income. Cash receivable or payable in connection with resale or repurchase agreements is recorded by calculating the present value of the price at maturity. The price at maturity is equivalent to the price of securities under the resale or repurchase agreement at the time of the transaction, plus the agreed premium. The present value of the price at maturity is determined by discounting such price using the yield rate from the price supplier. The yield rate used for discounts is that of an instrument similar to those under the repurchase and resale agreement, which matures within a term similar to the remaining term-to-maturity of the agreement in question. The result from valuation of cash receivable or payable under repurchase or resale agreements is recorded in the consolidated statements of income.

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Assets and liabilities related to securities deliverable or receivable under resale or repurchase agreements, net of assets or liabilities originating from cash to be received or paid on such transactions, are recorded in the consolidated balance sheets. Collateralized repurchase transactions - Repurchase transactions for more than three days represent loans with collateral, which prevents the entity granting such financing from negotiating or exchanging the securities upon which the transaction is based. Consequently, the entity receiving the financing maintains all the rights and risks associated with such securities. When the Financial Group receives financing, it recognizes the amount received by recording the respective liability based on the agreed transaction price. When recording the collateral agreed for this type of transaction, the assets used for guarantee purposes are recorded as restricted and valued based on the nature of each, i.e., as funds available or investments in securities, as required. The premium derived from the liability is recognized in results by the straight-line method for the duration of the transaction liability. When the Financial Group grants financing, it recognizes the respective amount by recording an account receivable based on the agreed transaction price. The agreed-upon collateral is recorded in memorandum accounts; the respective valuation is determined based on the guidelines established for securities recognized in the “Goods in custody or under administration” account. The asset premium is recognized in results by the straight-line method over the transaction period. The account receivable or payable, which represents the agreed transaction price when the Financial Group receives or grants financing, as the case may be, is shown on the consolidated balances sheet as a part of transactions involving securities and derivatives and is also recorded in results as a transaction premium forming part of the financial margin, an expense or interest income, as required. Derivative instrument transactions (trading purposes)- Options: Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander (the Brokerage House) issues options, which, in exchange for a premium, grant the holder the right to receive within a period or on a specific date, the market value of the stock or the Mexican peso amount based on the Mexican Stock Exchange Prices and Quotations Index (IPC), at the ratio of one Mexican peso for each point. Further, the customer decides whether to exercise its right, depending on the behavior of the price of the stock or the respective index, by making a second payment at a pre-established price. The premium of each issue is invested in the securities to which the option refers, so as to structure a hedge that is recorded under the line item of “Derivative financial instrument transactions” and creates an offsetting entry of reserves for issuance of options. The premiums collected on each issue are stated at fair value, as determined by the price vendor, and the valuation effect is recorded in income. A gain or loss is recorded in the statement of income when the option is exercised, the client acquires it in the secondary market, the issue matures or the hedges are sold. This gain consists of the proceeds from the sale of the hedges or, when the investor exercises its right, the loss is determined by subtracting the exercise price from the market value of the stock or the index price. Forward and future contracts for trading: Forward and future contracts for trading are those that establish an obligation to buy or sell an underlying asset on a future date at a pre-established amount, quality and price on a trading contract. Both forward and futures contracts are recorded by the Financial Group as assets and liabilities in the balance sheet at the exchange rate established in the related underlying asset purchase-sale contract, to recognize the right and the obligation to receive and/or deliver the underlying asset, and the right and the obligation to receive and/or deliver cash equivalent to the underlying asset subject matter of the contract.

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For financial information classification purposes, the asset or liability position, which results from derivative instruments granting rights or obligations such as swaps and futures contracts, is offset based on each contract and is presented as an asset or liability under the line item “Derivative financial instrument transactions”. In forward contracts, the difference between the agreed-upon exchange rate and the forward exchange rate at the end of each month is recorded under effects of valuation in the consolidated statements of income. Future contracts for trading are recorded at market value recording the difference between the market value and the settled price in the consolidated statements of income. 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. Considering the rights granted, options are divided into buy options (calls) and sell options (puts). Both may be used as trading or hedge instruments. 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 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. The Financial Group 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 statement of income under intermediation income, with the adjustment to the appropriate consolidated balance sheets account. Trading option contracts are recorded in memorandum accounts at their exercise price, multiplied by the number of securities, 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. The Financial Group 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, discounting the market interest rate on the valuation date using curves provided by the price vendor, which are reviewed by the market risk area. A swap contract may be settled in kind or in cash, according to the conditions established.

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Derivative hedging transactions - The Financial Group’s management carries out derivative transactions for hedging purposes, which involve futures and/or swap contracts. The resulting net asset or liability position is presented together with the primary position. The valuation of the asset and liability positions is recognized in the same way and account where the effects of the primary position are recorded, regardless of the type of hedge involved. 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 Banco de México. 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 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. Past-due loan portfolio - The Financial Group applies the following criteria to classify uncollected loans as past due: – Loans with a single payment of principal and interest at maturity are considered past due 30 days after

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

considered past due 90 days after interest is due or 30 days after principal is due. – Loans whose principal and interest payments have been agreed in periodic installments are considered

past due 90 days after they become due. – Revolving credit loans are considered past due when payment is not received in two monthly billing

cycles or 60 days after they become due. – Mortgage loans with periodic partial payments of principal and interest and are considered past due 90

days or more past due. – Customer checking accounts showing overdrafts will be reported in the past-due portfolio at the date of

the overdraft. Restructured past-due loans will remain classified in the past-due portfolio with their respective allowance for loan losses until proof exists of sustained payment, as prescribed by the Commission. Renewed loans where the debtor does not pay accrued interest on time and at least 25% of the original loan amount, according to contractual terms, will be considered past due until proof exists of payment receipt, as required by the accounting practices prescribed by the Commission. Once the portfolio is classified as past due, interest no longer accrues. This includes loans that capitalize interest according to contractual terms. For accrued but uncollected regular interest on past due loans, the Financial Group creates an allowance for an equal amount when the loan is transferred to the past-due portfolio.

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Classification of the loan portfolio and allowance for loan losses- Credit institutions must classify their portfolios under the following headings: a. Commercial: direct or contingent credits, including bridge loans denominated in Mexican pesos,

foreign currency or investment units, together with any interest generated, which are granted to corporations or individuals with business activities, intended for their commercial or financial activity; discount, rediscount, factoring operations and capital lease transactions executed with such corporations or individuals; credits granted to trustees who act under the protection of trusts, and the credit schemes commonly known as “structured”, in which there is an adjustment to net worth that enables the individual evaluation of the risk related to the scheme. Also, credits granted to the states, municipalities and their decentralized agencies will be included when they can be classified in accordance with applicable regulations.

b. Housing mortgages: direct loans denominated in Mexican or foreign currency or investment units,

together with the interest generated, granted to individuals for housing acquisition, construction, remodeling or improvement not intended for commercial speculation, including liquidity loans guaranteed with the debtor’s house and those granted to the former employees of credit institutions.

c. Consumer loans: direct loans denominated in Mexican or foreign currency or investment units,

together with the interest generated, granted to individuals derived from credit card and personal loan transactions, loans for acquiring durable consumer goods and financial leasing transactions performed with individuals, including loans granted for such purpose to the former employees of credit institutions.

As of the above date, the Financial Group recognizes reserves created to cover credit risks in conformity with such provisions, based on the following: Commercial portfolio: a. Individual method - For borrowers with balances of over 900,000 UDIs, entails evaluating:

– The creditworthiness of the debtor, based on the results obtained from the rating, in a specific and independent manner, the country, financial, industry risks and payment history, based on the methodology established in such provisions.

– A differentiation is made between personal and real collateral, based on an estimate of probable

loss. As a result of the analysis of real collateral, loans are classified into two groups, based on the discounted value of collateral: a) loans fully collateralized and b) loans with an exposed portion.

b. Non-individualized method - For borrowers with balances less than 900,000 UDIs:

– Parametric calculation of the allowance for loan losses based on the debtor’s payment history

over the last 12 months and its credit behavior.

c. The reserves for loans granted to states and municipalities and their decentralized agencies will be determined as follows:

1. Loans with balances equal to or exceeding an amount equal to the value of 900,000 UDIs in

Mexican pesos at the classification date must be classified individually according to the base classifications assigned by an agency authorized by the Commission, in conformity with the methodology established by applicable provisions.

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2. Loans with balances for amounts less than the value of 900,000 UDIs in Mexican pesos at the classification date may be classified by using the methodological parameters referred to in the preceding paragraph b).

3. After obtaining the respective debt classification, each loan granted to states and municipalities

and their decentralized agencies with guarantees is classified based on the actual guarantees in question, in conformity with the procedure established in the aforementioned provisions.

d. Loans intended for investment projects with their own payment sources during the construction stage

are evaluated based on the construction surcharge that could affect the institution, the extent of any delay or project implementation, together with an analysis of the financial projection based on the methodology established by applicable provisions. During the construction stage, the risk level is determined based on the evolution of the financial projection, in conformity with the aforementioned provisions.

e. The portfolio of government entities guaranteed by the Federal Government is not subject to portfolio

classification. The commercial portfolio is classified every quarter and filed with the Commission within the 30 days following the classification date. The allowance for loan losses is recorded based on the balance of the accounts on the last day of each month, considering the classification levels of the classified portfolio as of the latest known quarter, which includes the updated risks as of the current month-end. Consequently, the allowance for loan losses shown in the consolidated balance sheets as of December 31, 2006 and 2005 considers the year-end risks and balances. The allowance for loan losses to be established by the Financial Group under the individual method equals the amount generated by applying the respective percentage to the collateralized portion and, if applicable, to the unsecured portion of the credit rating, based on the following table:

Table of sites within the range of reserves Risk level Low Intermediate High

A-1 0.50% 0.50% 0.50% A-2 0.99% 0.99% 0.99% B-1 1.0% 3.0% 4.99% B-2 5.0% 7.0% 9.99% B-3 10.0% 15.0% 19.99% C-1 20.0% 30.0% 39.99% C-2 40.0% 50.0% 59.99% D 60.0% 75.0% 89.99% E 100.00% 100.00% 100.00%

Mortgage portfolio: When classifying the housing mortgage credit portfolio, the Financial Group considers all noncompliance reported during each billing period, the probability of noncompliance and/or, if applicable, the severity of the loss associated with the value and nature of loan guarantees.

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The Financial Group qualifies, constitutes and records reserves for the housing mortgage loan portfolio with figures at the final day of each month, in conformity with the following procedure: I. The entire portfolio is stratified based on the number of monthly payments for which noncompliance is

reported regarding the payment due at the classification date, using the payment history of each loan and data for at least nine months prior to such date, which is then classified by loan type, as detailed in the following table.

II. The reserves resulting from applying the respective loss severity derived from the noncompliance

probability shown in the following table, according to each loan type, to the total unpaid balances of loans at each level, are created. However, the classification amount does not include uncollected interest recorded on the balance sheet accrued by loans classified as part of the overdue portfolio. Uncollected interest accrued on the overdue portfolio is fully reserved when the respective loans are transferred.

Table applicable to the housing mortgage portfolio:

Number of unpaid installments Loss severity percentage

Probability of noncompliance

percentage (Portfolio 1) (1)

Probability of noncompliance

percentage (Portfolio 2) (2)

0 35% 1% 1% 1 35% 3% 5% 2 35% 7% 15% 3 35% 25% 50% 4 35% 50% 90% 5 35% 95% 95% 6 35% 98% 98%

7 to 47 70% 100% 100% 48 or more 100% 100% 100%

(1) Allowance percentage that is applied to the loan portfolio after June 1, 2000. (2) Allowance percentage that is applied to the loan portfolio denominated in Mexican pesos, restructured in

UDIs, or originally denominated in UDIs, granted prior to June 1, 2000, or loans granted after that date and subsequently restructured, or granted at variable interest rates without establishing a maximum rate or when the income percentage of the debtor exceeds 35% when the loan is granted.

The following table is used to assign the appropriate risk level (based on percentage ranges of allowances for loan losses):

Risk level Percentage ranges of allowances for loan losses A 0 to 0.99% B 1 to 19.99% C 20 to 59.99% D 60 to 89.99% E 90 to 100%

At December 31, 2006 and 2005, the classification and creation of the housing mortgage loan portfolio reserve is based on figures from the final day of each month and filed with the Commission no later than 30 days after the month is classified, based on the reserve percentages applicable to each portfolio type, as discussed above.

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Consumer loan portfolio: The Financial Group classifies, creates and records reserves for the customer loan portfolio, based on figures from the final day of each month, in conformity with the following procedure: I. The total portfolio is stratified based on the number of cases of noncompliance reported in each billing

period at the classification date regarding the due or minimum payments established by the Financial Group, based on payment history data from at least 9, 13 or 18 periods prior to that date.

II. The reserves resulting from applying the reserve percentages detailed below and depending on whether

billing periods are weekly, biweekly or monthly, to total unpaid loan balances, are created. Nevertheless, the Financial Group does not include uncollected interest recorded in the balance sheet accrued by loans forming part of the overdue portfolio. Uncollected interest accrued on the overdue portfolio is fully reserved when the respective loans are transferred.

The classification and creation of reserves for the consumer loan portfolio are based on the following reserve percentages.

Table applicable to loans billed monthly:

Number of billing periods reporting noncompliance (in months)

Loss severity percentage

Preventive Allowance percentages

0 100% 0.5% 1 100% 10% 2 100% 45% 3 100% 65% 4 100% 75% 5 100% 80% 6 100% 85% 7 100% 90% 8 100% 95%

9 or more 100% 100% Table applicable to loans billed biweekly:

Number of billings periods reporting noncompliance (biweekly)

Loss severity percentage

Preventive Allowance percentages

0 100% 0.5% 1 100% 3% 2 100% 10% 3 100% 25% 4 100% 45% 5 100% 55% 6 100% 65% 7 100% 70% 8 100% 75% 9 100% 80%

10 100% 85% 11 100% 90% 12 100% 95%

13 or more 100% 100%

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In order to determine the risk level, the following table, which is based on the percentages established in prior tables and the percentage ranges of applicable provisions, is applied:

Risk level Reserve percentage ranges

A 0 to 0.99% B 1 to 19.99% C 20 to 59.99% D 60 to 89.99% E 90 to 100%

At December 31, 2006 and 2005, the classification and creation of the consumer loan portfolio reserve is based on figures from the final day of each month and filed with the Commission no later than 30 days following the classified month, according to the reserve percentages applicable to each portfolio type, as discussed above. Evidence of sustained payment: The Institution maintains loans reporting payment noncompliance and the need for restructuring at the level in effect prior to such restructuring, until it obtains evidence of sustained loan payment under the terms established by the Commission. Additional portfolio reserves: As of December 31, 2006 and 2005, the Financial Group has recorded portfolio reserves in addition to the minimum requirements based on the standard model of the Commission and the reserves created in the restructuring process denominated “Commerce Fund” for commercial and mortgage portfolio, in the amount of $135 and $359, respectively. The amount of the portfolio reserves includes the reserves to cover the cost of the loan portfolio support program. Portfolio restructured in UDIs: The portfolio restructured in UDIs in the trusts is classified in conformity with the rules for commercial and mortgage loan portfolio classification, as applicable. Other receivables, net - The Financial Group has the policy of writing off identified and unidentified receivables against results, within 90 or 60 days after their initial posting, respectively. 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. Foreclosed assets are considered a monetary item for purposes of recognizing the effects of inflation in financial information. The valuation methodology used for reserves created for foreclosed assets or goods received as payment establishes the quarterly creation of additional provisions to recognize the potential drop 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, according to the following procedure:

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I. In the case of collection rights and real property, the provisions referred to in the preceding paragraph must be created as follows:

Personal property reserves

Time elapsed as of award or payment (in months) Reserve percentage

Up to 6 0% More than 6 and up to 12 10%

More than 12 and up to 18 20% More than 18 and up to 24 45% More than 24 and up to 30 60%

More than 30 100% The amount of reserves to be created will be the result of applying the respective reserve percentage according to the preceding table to the value of collection rights or real property received as payment, or awarded in conformity with accounting treatments.

II. Investments in securities must be valued according to treatment B-2, “Investments in Securities”, of the accounting treatments established by the Commission, based on annual audited financial statements and monthly reports.

Following the valuation of investments in securities awarded or received as payment, the reserves resulting from applying the percentages shown in the table detailed in the preceding section I must be applied to the estimated value, as discussed above.

III. In the case of real property, provisions must be established as follows:

Real property reserves Time elapsed as of award or payment (in months) Reserve percentage

Up to 12 0%

More than 12 and up to 24 10% More than 24 and up to 30 15% More than 30 and up to 36 25% More than 36 and up to 42 30% More than 42 and up to 48 35% More than 48 and up to 54 40% More than 54 and up to 60 50%

More than 60 100%

The amount of reserves to be created will be the result of applying the respective reserve percentage based on the above table, to the foreclosure value of the real properties obtained in accordance with the accounting treatments. Additionally, if realization problems are identified with the values of the foreclosed real properties, the Financial Group records additional reserves based on estimates prepared by management. If a valuation performed after goods are awarded or received as payment results in an accounting record reflecting a decrease in the value of collection rights, securities, real or movable property, the reserve percentages referred to in the preceding table must be applied to the adjusted value.

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Properties, furniture and fixtures, net - Properties, installation expenses and leasehold improvements are recorded at acquisition cost and restated using a factor derived from the UDIs. Depreciation and amortization is recorded by applying a determined percentage to restated cost based on the estimated economic useful life of the properties. When property is available for sale, it is recorded at the lower of its net realizable value, estimated by the Financial Group’s management. Furniture and fixtures are recorded at acquisition cost and were restated at December 31, 2003, by applying a factor derived from the UDI value. As of that date, given that acquisitions of furniture and fixtures are considered as monetary items, the respective restatement effect is recognized as part of the monetary position result within the result of the year. The respective depreciation is recorded by applying a percentage based on the estimated useful economic life of such goods to the restated cost at the last restatement date or the acquisition cost of goods acquired as of January 1, 2004. Investments in shares - The investment in shares is represented by the investment in shares of the insurance company, which is a subsidiary, associated companies and Mutual Funds Specializing in Managing Retirement Savings Funds (SIEFORE), managed by the Administrator, and which therefore is not subject to consolidation with the Financial Group. Investments in shares of unconsolidated subsidiaries and associated companies are originally recorded at acquisition cost and restated at year-end using a factor derived from the UDIs or based on the equity method, by adding the lower of the proportional part of income or losses and the variations in the stockholders’ equity accounts reported by the companies to the book value of the investment. In the case of the SIEFORE and the investment funds managed by the Administrator, the valuation increase is the result of comparing the original value of the investment with the book value of such investment on the day prior to the yearly close. The valuation increase at book value is recorded in the consolidated statements of income under the heading “Equity in results of subsidiaries and associated companies”. Deferred income tax and employee statutory profit sharing - The Financial Group recognizes the comprehensive effect of deferred income tax by comparing the book and tax values of assets and liabilities. Temporary differences arise from this comparison, which are increased by available tax loss carryforwards and the tax credit for undeducted allowances for loan losses, and the tax rate at which the items will reverse is applied thereto. As of December 31, 2006 and 2005, the Financial Group had not recorded any anticipated effect for employee statutory profit sharing, because it considers this to be a contingent asset. Financial Group management records a reserve for the deferred tax (asset) to recognize only the deferred tax asset which it believes can probably be recovered, considering for this treatment only the amount generated by the effect of the tax credit for the undeducted allowance for loan losses expected to reverse in the short-term (one year) in accordance with the financial and tax projections prepared by management. Therefore, the effect of such tax credit is not fully recorded. The deferred tax is recorded by using results or stockholders’ equity as an opposite account, depending on how the item originating the anticipated (deferred) tax was recorded. Other assets - Software, system developments and tangible assets are originally recorded at nominal paid amount, and restated from the date incurred through year-end using the UDI factor. The amortization of software, system developments and intangible assets with a defined life is calculated using the straight-line method by applying the respective rates to the restated expense. Furthermore, the heading of “Other assets” include financial instruments of the pension and retirement fund held in custody by the Brokerage House and Almacenadora Somex, S.A. de C.V. (a subsidiary of the Bank) (Almacenadora Somex) as well as mortgage loans granted to employees with the fund’s resources. Both the investments and loans granted make up the fund to cover the obligations for the employee pension plan and seniority premiums.

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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 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 of “Other assets”. If it is less, such balance will be presented by decreasing the heading of “Sundry creditors and other accounts payable”. As of December 31, 2006 and 2005, the balance applicable to the Brokerage House and Almacenadora Somex is presented under the heading of “Other assets” and the balance applicable mainly to the Bank and Afore is presented by decreasing the heading of “Sundry creditors and other accounts payable”. Provisions - Provisions are recognized when there is a present obligation derived from a past event, which will probably result in the outlay of economic resources, and can be reasonably estimated. Employee benefits - Under Mexican Labor Law, the Financial Group is liable for severance payments and seniority premiums to employees terminated under certain circumstances. Similarly, there are other obligations under the collective bargaining agreement. The Financial Group’s policy is as follows: – Liabilities for seniority premium, pensions and post-retirement medical benefits are recorded as they

are accrued in accordance with actuarial calculations using the projected unit credit method, at real interest rates, with contributions made to the fund on the same basis, as indicated in Note 25 in the accompanying consolidated financial statements.

Interest on convertible subordinated debentures - Interest accrued on subordinated debentures is charged to income as accrued and is translated at the exchange rate in effect at the month-end closing. Insufficiency in restated stockholders' equity - Insufficiency in restated stockholders’ equity consists of the monetary position result accumulated through the first restatement. Stockholders’ equity restatement effects - Paid in capital and other capital are restated using a factor derived from the UDI. The gain or loss from holding nonmonetary assets derived from the valuation of long-term investments in shares and fixed assets, presented in the consolidated statements of changes in stockholders’ equity, represents the change in the specific price level of these assets and its effect on the results of operations as compared to the change in the UDI. Revenue recognition from loan portfolio interest and commissions collected - Interest on loans granted is recorded in the statement of income as accrued, based on established contractual terms and interest rates, which, in general, are periodically adjusted per market and economic conditions. Interest accrued during the period in which a loan is classified in the past-due portfolio is recognized in revenues when it is collected, or added to the restructured amounts if there is evidence of sustained payment. Interest collected in advance from lending activities is recorded in the statement of income as deferred revenues under “Deferred credits” and flows to earnings as it is earned. Commissions on the granting of credit and rendering of services are recorded in the consolidated statements of income upon collection. Restatement of revenues and expenses - Revenues and expenses associated with a monetary item (funds available, financial instruments, loan portfolio, other receivables, liabilities, etc.) are restated from the month in which they arise through year-end, based on factors derived from the UDI.

25

Other revenues or expenses related to the consumption or sale of nonmonetary items (property, furniture and fixtures and installation expenses) are restated when consumed or sold based on the restated value of the asset consumed or sold with the inflation factor derived from the UDI, and are restated through year-end with such factor. Monetary position loss - Monetary position loss, which represents the erosion of the purchasing power of monetary items (funds available, financial instruments, loan portfolio, other receivables, liabilities, etc.) caused by inflation, is calculated by applying the UDI inflation factor to net average monetary assets or liabilities of each month and is restated through year-end with such factor. Monetary position loss is generated from liabilities, whose expenses represent the margin and are recognized as part of the financial margin. The monetary position loss generated from the rest of the line items is recorded under other expenses. The monetary position loss derived from the valuation of securities available for sale is recognized in stockholders’ equity and applied to the consolidated statements of income as such securities are sold. Earnings per share - Basic earnings per share is calculated by dividing the net majority income 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, 2006 and 2005, basic earnings per share were MX$1.871149 and MX$1.298732 pesos (face value), respectively. Comprehensive income - Comprehensive income presented in the accompanying consolidated statements of changes in stockholders’ equity is the result of transactions other than those carried out by the Financial Group’s stockholders during the period and consists of net income for the year plus the effects from holding nonmonetary assets, the creation and cancellation of provisions and reserves applied to stockholders’ equity accounts, the effect from the valuation of securities available for sale, the effect of recognizing deferred taxes (assets) derived from the creation of allowances for credit risks from prior years applied to retained earnings, and the adjustment for labor obligations, which were recorded directly in stockholders’ equity in conformity with the established accounting practices and special authorizations granted by the Commission. Consolidated statements of changes in financial position - The consolidated statements of changes in financial position presents the changes in constant Mexican pesos, according to the financial position at the prior year-end, restated to Mexican pesos as of the most recent consolidated balance sheet date. Memorandum accounts-

– Guarantees granted:

Guarantees granted result from the classification of lines of credit, subject to term and other legal restrictions. Items under this account are subject to classification.

– Irrevocable lines of credit granted: This item represents the amounts of unused letters of credit granted by the Financial Group, which are considered irrevocable commercial credit. Items under this account are subject to classification.

– Goods in trust or mandate: Different management trusts are kept to independently account for goods received. Mandates include the declared value of the goods subject to mandate contracts entered into by the Financial Group.

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– Goods in custody or under administration: This account includes the activity of third-party goods and securities received in custody or to be managed by the Financial Group.

– FOBAPROA or IPAB transactions– committed amounts: This account balance represents the amount of cash items and other goods and rights received but not delivered to FOBAPROA (Bank Savings Protection Fund) or IPAB (Bank Savings Protection Institute).

– Securities receivable under resale agreements: The amounts equal to fair value of transactions performed by the Financial Group as the reselling party are recorded in this account.

– Securities deliverable under repurchase agreements: Amounts equal to fair value of transactions performed by the Financial Group as the repurchasing party are recorded in this account.

– Customer cash and securities received in custody, pledged as collateral, guarantee and under administration: Cash and securities owned by customers and held in custody, pledged as collateral and under administration with the Brokerage House, are reflected in the respective memorandum accounts and are valued according to the latest market price provided by the price vendor. a. Cash is deposited with credit institutions in checking accounts other than those in the name of

the Brokerage House. b. Securities held in custody but under administration are deposited with S.D. Indeval, S.A. de

C.V. (S.D. Indeval). – Securities owned by the Financial Group delivered in custody, in guarantee and derivative financial

instruments: The Brokerage House’s securities delivered in custody, in guarantee and derivative financial instruments are presented in the respective memorandum accounts and represent the following: a. The Brokerage House’s securities owned by the Financial Group are deposited with S.D.

Indeval.

b. Derivative instruments represent options and together with the premium collected on their issue, are recorded at fair value.

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5 Funds available As of December 31, 2006 and 2005, funds available were as follows:

2006 2005 Banco de Mexico, net $ 33,198 $ 34,579 Time deposits 162 5,717 “Call money” transactions granted 21,078 18,646 Guarantee deposits (margin accounts) 9,959 2,887 Cash 9,936 5,865 Foreign correspondent and Mexican banks, net 322 854 Foreign currency purchase-sale transactions (settled in 24-48

hours) 7,009 6,420

81,664 74,968 Net position of hedging derivatives 10 (95)

Total funds available $ 81,674 $ 74,873

As of December 31, 2006 and 2005, the Banco de México account includes regulatory monetary deposits made by the Financial Group of $33,069 and $34,446, respectively. As the term of this Regulatory Monetary Deposit’s is indefinite, Banco de México 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 Banco de México. “Call money” transactions performed as of December 31, 2006 and 2005 consist of the following:

2 0 0 6 Counterpart Days Rate Balance

(Mexican pesos)

Banamex S.A. 4 7.00% $ 4,394 Banamex S.A. 4 7.05% 5,003

(Foreign currency)

Barclays Bank PLC Miami 4 5.375% 2,001 Barclays Bank PLC Miami 4 5.38% 2,542 Barclays Bank PLC M 4 5.22% 649 Bank of Tokio Mitsubishi NY 4 5.38% 1,081 Royal Bank of Canada 5.26% 2,163 Svenska Handelsbanken New York 5.25% 3,245 $ 21,078

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2 0 0 5

Counterpart Days Rate Balance (Mexican pesos)

BBVA Bancomer, S.A. 3 8.25% $ 527 Banco Mercantil del Norte, S.A. 3 8.25% 81

(Foreign currency)

Barclays Bank PLC Miami 4 4.20% 6,105 Banco Santander Central Hispano NY 4 4.00% 410 Banco Santander Central Hispano NY 4 4.10% 6,538 Svenska Handelsbanken New York 4 4.00% 4,985

$ 18,646

Foreign exchange receivable and deliverable on purchases and sales to be settled in 24 and 48 hours at December 31, 2006 and 2005, consists of the following:

2006 Balance in Foreign currency Mexican pesos

(Millions of US dollars) Purchase of foreign exchange receivable in 24 and 48 hours

US dollar 1,715 $ 18,543 Sale of foreign exchange to be settled in 24 and 48 hours

US dollar (1,067) (11,534) 648 $ 7,009

2005 Balance in Foreign currency Mexican pesos

(Millions of US dollars) Purchase of foreign exchange receivable in 24 and 48 hours

US dollar 1,458 $ 16,152 Sale of foreign exchange to be settled in 24 and 48 hours

US dollar (879) (9,732) 579 $ 6,420

When the foreign exchange deliverable or receivable on the sales and purchases are reflected under the heading of “Funds available”, the accounts used to settle the counter value of such transactions are recorded net in the consolidated balance sheets under the headings of “Other accounts receivable, net” and “Sundry creditors and other accounts payable”.

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6 Investment in securities Trading securities- As of December 31, 2006 and 2005, trading securities were as follows:

2 0 0 6 2 0 0 5 Acquisition Interest (Loss) cost accrued Gain Total Total

Debt instruments: Government securities-

Treasury bills (CETES), (net) $ 258 $ - $ - $ 258 $ 160 United Mexican States Bonds (UMS) 2,506 96 (50) 2,552 17,755 U.S. Treasury Bills 11 - - 11 - Federal Government Development Bonds (BONDES) 5,960 140 46 6,146 1,647 M, M3, M5, M7and M0 Bonds 12,918 - 5 12,923 11,850 Participation certificates - - - - 109

Private bank-issued securities- Promissory note with yield payable at maturity (PRLV) 1,758 1 1 1,760 1,303 Bank bonds 10 - (10) - 564 Debentures 3,264 8 (4) 3,268 60 Stock certificates 367 - 2 369 - Commercial paper 4,753 4 - 4,757 1,052

Capital market instruments: Shares 4,206 - 306 4,512 1,547 Other investments 414 - 6 420 334

Value date transactions: Government securities-

Treasury bills (CETES), (net) - - - - (51) Federal Government Development Bonds (BONDES) 1,021 - (1) 1,020 (1,197) M, M3, M5, M7and M0 Bonds (net) (1,359) - (6) (1,365) (1,400)

Private bank-issued securities Stock certificates 100 - - 100 -

Total trading securities $ 36,187 $ 249 $ 295 $ 36,731 $ 33,733

As of December 31, 2006 and 2005, the investment in CETES and M and M0 Bonds includes the amounts of $12,896 and $11,242, respectively, which refer to the guarantee on security loan transactions, where the lender is Banco de México. As of December 31, 2006 and 2005, the offsetting liability is reflected in the consolidated balance sheet line item “securities deliverable under loan transactions” for $12,649 and $11,493, respectively.

30

As of December 31, 2006 guarantees on securities loan transactions consist of the following:

Term of loan in days Amount Asset guarantee:

M Bonds 4 $ 12,896 12,896

Loan liability with Banco de México: Cetes 4 1,284 M0 Bonds 4 2,247 M Bonds 4 9118 $ 12,649

Securities available for sale- As of December 31, 2006 and 2005, securities available for sale were as follows:

2 0 0 6 2005 Acquisition Interest (Loss) Cost Accrued Gain Total Total

Debt Instruments: Government Securities-

M, M3 and M5 Bonds $ - $ - $ - $ - $ 54,039 United Mexican Status Bonds (UMS) - - - - 611

Capital market instruments - Shares listed on the stock market - - 308 308 71

Other-

Hedge Swap - - - - (96)

Total Securities Available for Sale $ - $ - $ 308 $ 308 $ 54,625 As of December 31, 2006 and 2005, a monetary position result of $(4) and $(3), respectively, net of appreciation, has been recorded, showing a net amount of $218 and $1,053 in the heading of “Result from valuation of securities available for sale, net”. In order to take advantage of market rates, during July and August 2006, management decided to transfer the portfolio (M’s bonds) classified as “Available-for-sale” to the “Tradable” category at market prices. Following this transfer, the surplus value recorded under stockholders' equity at that date was recorded in the statement of income under the “Result from intermediation” heading for the approximate amount of $1,592. During February 2006, the Bank sold its position in United Mexican States bonds (“UMS”), equivalent to 606,000 UMS bonds at a value of US $890.8 million, and a position in Cross Currency Swaps (“CCS”), which was settled early, equivalent to 17 CCS, whose face value was US $528 million, and 4 IRS whose face value was US $78 million. Such position was collectively denominated an “Asset Swap”. The Bank recorded a profit of $639 on this transaction, which was recorded in the income statement

.

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Securities held to maturity - At December 31, 2006 and 2005, securities held to maturity were as follows:

2006 2005

Government securities- Special CETES - domestic productive plant program $ 424 $ 411 Special CETES - program of credit support and additional

benefits to the States and Municipalities 1,613 1,578 Special CETES - support program for housing loan debtors 2,434 2,383 United Mexican States (UMS) Bonds 1,358 2,631 State participation certificates (CPO’s) - 105 PEMEX Bonds 170 177

Total securities held to maturity 5,999 7,285 Less-

Hedge SWAP (104) (288) Reserve for Special Cetes (668) (785)

Total securities held to maturity, net $ 5,227 $ 6,212

As mentioned in Note 3, on March 30, 2000, the Board of Directors of Banca Serfin 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) recorded by Banca Serfin in March 2000. This reserve was applied to retained earnings at that date, based on 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 UDI restructured portfolio trusts. As a result of the collection in the UDI restructured portfolio trusts, Banco de México paid Banca Serfin (currently Banco Santander) UDI-denominated Special CETES in 2006 and 2005. According to the provisions established in the official document mentioned above, Banca Serfin released reserves of $88 and $93, respectively, against consolidated income for the year, recorded in the “Other income” account. As of December 31, 2006 and 2005, the amount of this reserve is $668 and $785, respectively. In November and December 2005, the Group eliminated a hedge transaction with derivative financial instruments in which the primary position was United Mexican States Bonds (UMS) and the hedging instrument was Cross Currency Swaps (CCS). Accordingly, it transferred the “UMS” that it had as securities held to maturity to the category of trading securities, and the amount transferred was $13,716 at such dates, whose valuation effect at fair value was a gain of $1,035 as of December 31, 2005, recognized in results of the year 2005, net of the deferred tax effect. The CCS were transferred to the heading of “Derivative financial instrument transactions”, whose valuation was modified based on accrued interest at fair value, to show a loss of $(406) as of December 31, 2005, recorded in results of the year 2005, net of the deferred tax effect.

7 Repurchase and resale agreements According to Commission treatment B-3, “Repurchase and Resale Agreements”, the asset and liability position of each of the transactions carried out by the Financial Group is offset on an individual basis. The debit or credit balance resulting from each of the offsets is presented on the asset or liability side of the consolidated balance sheets, as part of security and derivative transactions.

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As of December 31, 2006 and 2005, the debit and credit balances in repurchase and resale transactions were as follows:

2006 2005 Average Average Term of Term of repurchase repurchase agreement in

days Amount agreement in

days Amount

As reselling party: Government securities-

Treasury Bills (CETES) 30 $ 3,329 18 $ 874 Federal Government

Development Bonds 16 224,402 3 207,547 Federal Government

Development Bonds in UDIS 4 144 3 80

Subtotal 227,875 208,501

Bank securities- Bank promissory note 19 8,002 3 5,115

Subtotal 8,002 5,115

Private securities- Stock certificate 8 10,304 20 3,296

Subtotal 10,304 3,296

(Deduct) - Valuation of securities at market (587) (165)

Total securities receivable under resale agreements 245,594 216,747

Less-

Creditors under resale agreements 246,218 216,926

Valuation at present value of the price at maturity 544 351

Total creditors under

resale agreements 246,762 217,277

Total $ (1,168) $ (530)

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2006 2005 Average Average Term of Term of repurchase repurchase agreement in

days Amount agreement in

days Amount

Acting as the securities purchaser: Repurchase agreement debtors $ 12,636 $ 8,142 Valuation at present value 41 10

Total repurchase agreement debtors 12,677 8,152

Less -

Government securities - 12 12,600 14 8,128 Federal Government

Development Bonds 12,600 8,128 Subtotal

Add – securities market valuation (301) (18) Total securities to be delivered

under repurchase agreement 12,299 8,110 Total $ 378 $ 42

8 Derivative financial instrument transactions

At December 31, 2006 and 2005, the position for transactions with derivative financial instruments for trading purposes is as follows:

2006 2005 Nominal Net Nominal Net

Asset position Amount Position Amount Position Futures (Mexican pesos)-

Peso futures $ 1,511 $ - $ 1,540 $ - Dollar futures 4,720 - 596 - Futures rates (TIIE) 1,245,100 - 9,881 - Futures indexes 110 - 49 -

Forwards (Mexican pesos)-

Forward contracts exchange rate 64,521 1,257 52,062 2,145 Indexes 390 9 - -

Options-

Foreign currency options 21,593 273 29,776 781 Securities options 900 123 243 23 Interest options 225,817 415 6,351 72 Options indexes 27,586 1,598 - -

Warrant w/indeces 120 12 - - Swaps-

Interest-rate swaps 1,588,794 42,929 883,661 21,454 Exchange rate swaps valued in

Mexican pesos 26,923 1,412 23,257 1,261 Stock swaps - - 70 1

Total asset position $ 3,208,085 $ 48,028 $ 1,007,486 $ 25,737

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2006 2005 Nominal Net Nominal Net

Liability position amount position amount Position Futures (Mexican pesos)-

Peso futures $ 25 $ - $ 25 $ - Dollar futures 4,821 - 5,437 - Futures rates (TIIE) 2,660,669 - 1,885,070 - Futures indexes 1,928 - 1,297 - Futures values - - 22 -

Forwards (Mexican pesos) - Foreign currency forwards 57,090 1,078 56,114 1,893 Forwards rates 386 13 3,190 3

Options-

Foreign currency options 20,911 332 27,211 665 Interest options 28,131 2,472 44 12 Options indexes 13 10 15,877 29 Options rates 266,278 416 - -

Warrant w/indexes 101 - - -

Swaps-

Interest rate swaps 1,817,482 39,587 861,951 21,029 Exchange rate swaps valued

in Mexican pesos 33,247 1,978 27,318 4,508

Total liability position $ 4,891,082 $ 45,886 $ 2,883,556 $ 28,139 The valuation effect of the trading derivative instruments is reflected in the statement of income under “intermediation income”. In conformity with the accounting practices prescribed by the Commission, the valuation effect of futures is presented under “Margin accounts”, together with minimum initial contributions, under the heading of “Funds available”. As of December 31, 2006 and 2005, the valuation effect of trading and hedge futures is $(624) and $(1,803), respectively. Derivative financial instrument transactions for hedging purposes - As of December 31, 2006 and 2005, the Bank presents hedging positions in Swaps (Interest Rate and Cross Currency), and 28 day TIIE futures, whose intention is to cover the financial margin through cash flow hedges with variable primary position amounts covered throughout the term of the hedges. As of December 31, 2006 and 2005, the applicable hedge is equivalent to a notional amount of $21,672 and $54,213 (face value), respectively. The primary positions being hedged are FOBAPROA notes, IPAB credits, Monetary Regulation Deposits, Highway Bonds (settled in the final quarter of 2005), UMS Bonds, Special Cetes and certain commercial loans, which are considered as funded by “Core deposits” (demand and term deposits), except for the commercial loans, which have specific funding.

35

As of December 31, 2006, the hedging derivative positions are as follows:

Face value Instrument In millions Instrument being hedged

Swaps IRS 11,800 MXP Monetary regulation

deposits 7,045 MXP Commercial portfolio 10 USD Commercial portfolio 130 USD UMS Bonds (securities

held to maturity) Cross Currency Swap 121 USD Commercial portfolio

As of December 31, 2005, the hedging derivatives positions are as follows (face values):

Face value Instrument In millions Instrument being hedged

Swaps IRS 4,650 MXP FOBAPROA note 22 USD Commercial portfolio 130 USD UMS Bonds (securities

held to maturity) 4,460 MXP Commercial portfolio 21,249 MXP Monetary regulation

deposits 5,450 MXP IPAB credit 400 MXP Special Cetes Cross Currency Swap 70 USD UMS Bonds (securities

held to maturity) 193 USD Commercial portfolio 20 EUR UMS Bonds (securities

held to maturity) 50 USD UMS Bonds (available-

for-sale) The hedging derivatives position is recorded in the same way as the primary position covered (hedged), whether based on the interest accrued or at fair value. At December 31, 2006, the hedging contracted by the two banks sometimes extends to 2016, although there are variations regarding the hedged amount during that period. During 2005, the Institution maintained 28-day derivative financial instruments as hedges (TIIE futures) with separate, consecutive contracts for a period of approximately one year. These instruments covered the FOBAPROA promissory note and IPAB loans. At December 31, 2005, the applicable hedge is equal to a notional amount of $12,802 (face value). Similarly, at that date, the surplus value (shortfall) of futures hedges was $2, which is presented in “margin accounts” together with the initial minimum contributions recorded under the “Funds Available” heading. Note 6 explains the hedging part eliminated from the UMS Bonds, which were covered by Cross Currency Swaps; it also explains the effects on the results of 2005 and 2006.

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According to the Management of the Financial Group, the derivative financial instrument hedges mentioned above reasonably cover the profits and financial margin for movements in market variables, such as interest rates and exchange rates, for the amounts being hedged. As a result, the Bank’s management states that the effectiveness of hedging the primary positions of TIIE Futures, Swaps IRS and Cross Currency Swaps is significant. Each of the hedging positions is presented in the consolidated balance sheets, net of the primary position being hedged, and the results of the derivative financial instruments are recognized parallel to the primary position, with both effects presented in the same heading of the consolidated statements of income.

9 Loan portfolio The detail of the loans granted by economic sector as of December 31, 2006 and 2005 is as follows:

2006 2005 Portfolio sold to FOBAPROA $ 22,009 $ 23,553 Federal Government loans 33,736 48,549

Subtotal Federal Government 55,745 72,102 Manufacturing industry 21,941 20,302 Retail 69,184 43,273 Other activities and services 25,230 12,255 Commercial 15,792 12,909 Communications and transportation 9,671 3,232 Construction 7,719 4,642 Tourism 2,329 3,096 Farming and cattle-raising 1,031 1,048 Mining 85 14 152,982 100,771 208,727 172,873 Interest collected in advance (35) (26) Unaccrued financial burden from financial leasing transactions (97) (86) 208,595 172,761 Net position of hedging derivatives (36) (19) $ 208,559 $ 172,742

The average placement rate in 2006 was 13.38%, 6.44% and 7.90% for loans in Mexican pesos, US dollars and UDIS, respectively, while in 2005 it was 13.44%, 4.62% and 8.61% for loans in Mexican pesos, US dollars and UDIS, respectively.

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Risk diversification - According to the general provisions applicable to credit institutions with regard to the diversification of risks derived from the performance of active and passive transactions, at December 31, 2006, the Institution has the following credit risk transactions: – Financing granted to debtors or groups representing a joint risk, the individual amount of which exceeds

10% of the Bank's basic capital. This risk is composed of two groups representing the total amount of $10,849, which is equal to 22.67% of the Bank's basic capital.

– Loans granted to the three main debtors or groups representing a joint risk for the aggregate amount of

$15,134, which represents 31.62% of the Bank's basic capital. Loans to related parties - As of December 31, 2006 and 2005, loans granted to related parties in conformity with Article 73 of the Credit Institutions Law were $2,272 and $2,732, respectively, which were approved by the Board of Directors. Federal Government loans - As a result of the economic crisis during 1998, the Federal Government and the Mexican Bankers’ Association established bank debtor credit support programs and agreements, to enable debtors to meet their obligations with credit institutions. The most significant support program was the so-called “Final Aid” program, which concentrated several support programs. The Instituto para la protection del Ahorro Bancario (IPAB), as the Federal Government Financial agent, acting on behalf of Banco de México, paid the Bank the following face value amounts out of the Federal Government support-related funds, derived from the application of the Bank Debtor Support and Final Aid Programs, for the benefits granted in the periods 2005 (collected in 2006) and 2004 (collected in 2005), respectively, as follows (nominal amounts):

2006 2005 FOVI-type housing loans $ 48 $ 54 Medium and high-income housing loans 281 279 Micro, small and medium-sized company loans - 1 Farming, cattle-raising and fishing activities 1 1 Conditioned loans for farming, cattle-raising and fishing

activities 2 2

Total $ 332 $ 337 As of December 31, 2006 and 2005, loans granted to the Federal Government agencies, including those of the support programs and agreements, were as follows:

2006 2005 Unconditioned outstanding loans:

Additional Benefit Program for- Mortgage debtors $ 266 $ 284 FOVI-type mortgage debtors 48 49 Derived from the Final Aid Support Program-

Farming, cattle-raising and fishing activities 1 1 315 334

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2006 2005 Conditioned outstanding loans:

Derived from the Final Aid Program- Farming, cattle-raising and fishing activities 2 2

2 2 Loans derived from credit support programs 317 336 Other loans granted to government agencies:

Simple loans 31,769 46,632 Unsecured loans 1,419 - Discounted portfolio loans 231 1,587

33,736 48,555

Net position of hedge derivatives - (6) Total government loans $ 33,736 $ 48,549

Unsecured loan granted to IPAB - On October 5, 2001, the Bank entered into an unsecured loan contract with IPAB for $10,000 (face value), divided into four portions (A, B, C, D) of $2,500 (face value). The loan matures in 10 years, payable in 10 semiannual equal and consecutive installments of $250 for each portion of the loan, from March 15, 2007 to October 13, 2011. Interest on the outstanding principal of each portion of the loan is computed at the rate resulting from adding 0.25% to the 28-day TIIE. The contract also establishes that IPAB may make partial or total prepayments in advance of any of the loan portions without being subject to penalties or premiums. These payments may be made only on the dates determined for the payment of interest and will be applied to the outstanding principal balance of the applicable loan portion. Accordingly, IPAB paid the amount of $3,000 (face value) during 2006. In July 2002, the Institution entered into an unsecured loan contract with IPAB for $8,936 (face value), divided into four portions. The loan matures in 10 years and 10 months, payable in 10 equal and consecutive installments for each portion of the loan, from January 2008 to 2012. Interest is computed at the TIIE rate plus 0.25%; during 2006, IPAB paid the amount of $1,787. The balance of the loan granted to IPAB is included under “Government loans”. Loans granted by type and currency at December 31, 2006 and 2005, are as follows:

2 0 0 6 Valued amount

Loan type Pesos Pesos Pesos Pesos

Current portfolio: Commercial loans $ 68,265 $ 12,369 $ 7 $ 80,641 Loans to financial entities 2,813 4 - 2,817 Consumer loans 50,656 - 207 50,863 Housing loans 12,972 - 3,177 16,149 Loans to government

entities 29,417 3,135 1,184 33,736 IPAB or FOBAPROA

loans 22,009 - - 22,009

$ 186,132 $ 15,508 $ 4,575 $ 206,215

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2 0 0 6 Valued amount

Loan type Pesos Pesos Pesos Pesos Overdue portfolio:

Commercial loans $ 230 $ 50 $ - $ 280 Consumer loans 1,807 - 7 1,814 Housing loans 158 - 90 248 Other outstanding debts 2 - - 2

$ 2,197 $ 50 $ 97 $ 2,344

2 0 0 5 Valued amount

Loan type Pesos Pesos Pesos Pesos

Current portfolio: Commercial loans $ 46,601 $ 8,924 $ 18 $ 55,543 Loans to financial entities 1,392 1 - 1,393 Consumer loans 29,117 - 243 29,360 Housing loans 9,118 - 3,635 12,753 Loans to government

entities 37,321 9,467 1,761 48,549 IPAB or FOBAPROA

loans 23,553 - - 23,553

$ 147,102 $ 18,392 $ 5,657 $ 171,151 Overdue portfolio:

Commercial loans $ 481 $ 67 $ 1 $ 549 Consumer loans 758 - 3 761 Housing loans 171 - 108 279 Other outstanding debts 2 - - 2

$ 1,412 $ 67 $ 112 $ 1,591

10 UDI restructured portfolio As of December 31, 2006 and 2005, the Financial Group’s UDI-restructured loan portfolio (net of reserves) was recorded in trusts, as follows:

2 0 0 6 2 0 0 5 UDIS MN UDIS MN

955,109,537 $ 3,619 1,252,710,155 $ 4,747

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11 Loan to FOBAPROA or IPAB As a result of Banco Santander’s capitalization program, on April 1, 1997, the Bank entered into a flow participation program agreement with Banco de México, in its capacity as trustee of the Bank Savings Protection Fund (FOBAPROA) and the Federal Government, represented by the SHCP as guarantor, whereby the agreements entered into on December 31, 1995 by FOBAPROA and Banco Santander were amended. Such modification had been previously agreed upon by both parties through an amendment agreement entered into on January 2, 1997. Through this agreement, the Bank undertakes with FOBAPROA to apply in the trust managed by Banco Santander, any amounts and other goods and rights (resources) which it receives from the management, recovery and collection of loan rights referred to in the agreement. As consideration for the loan portfolio so assigned, the Bank received (at face values) two promissory notes for $7,185 (Promissory Note I) and $6,701 (Promissory Note II), which bear interest at the 91-day CETES rate plus 1.65% for the October 1, 1996 - January 15, 1997 period, and at the 91-day TIIE rate from January 16, 1997 through maturity, as well as payment obligations of US$600,000,000 and US$511,050,052, respectively, bearing interest at LIBOR plus 3%. The promissory notes are guaranteed by the Federal Government, fall due in March 2007 and were issued with a value date of October 1, 1996. On June 1, 1997, upon repurchasing certain loans, the principal amounts of the above-mentioned promissory notes were changed. Accordingly, both the notes denominated in Mexican pesos and the payment obligations in US dollars were replaced on the same date. Interest accrual and payment conditions remained unchanged. Consequently, a new Promissory Note I for $8,034 (face value) and a new Promissory Note II for $8,388 (face value) were issued. Similarly, the new US dollar-denominated payment obligations were issued in the amounts of US$488,861,244 and US$438,311,685, respectively. In prior years, the IPAB early repaid the Group the total amount of US dollar obligations, including principal of US $289,948,131 and interest of US $3,189,429. The most significant covenants included in the agreement are as follows: 1. On each interest payment date, FOBAPROA will be entitled to prepay, at no cost, outstanding balances,

which under no circumstances may be less than US$5,000,000 or its equivalent in Mexican pesos.

2. FOBAPROA agrees to pay, on the first anniversary of the promissory notes and subsequently every six months, any positive differences between borrowing rates and the rates yielded on the promissory notes issued by FOBAPROA, calculated according to the procedure set forth in the agreement.

3. The Bank agrees to furnish all information and documents related to the loans, and to manage, collect and

recover the loan portfolio.

4. If the Bank should fail to provide any information requested and a loan is not collected for that reason, it will promptly substitute the loans at the prior request of FOBAPROA, within a 20-day term following the deadline for furnishing such information.

5. Expenses related to management, collection and recovery activities and the performance of the acts and

arrangements referred to above have been included in the commission fee, except for:

a. Overall legal or other extraordinary expenses.

b. Costs related to early loan cancellation according to government programs.

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c. Expenses and fees that result directly from Banco Santander’s acquisition (through foreclosure, goods given in lieu of payment or any other means), sale or holding of assets.

6. The main characteristics of the trust managing the transferred portfolio are that it will not be responsible

for any losses suffered; the consideration received by Banco Santander will not be subject to the cash flows from the transferred assets, and there is a covenant for gratuitous transfer of title to the assets upon termination of the trust agreement.

Another agreement was executed, with Banco de México acting as the trustee of FOBAPROA, before the Commission, whereby FOBAPROA was granted the right to acquire CINTRA shares. This right was exercised and the Bank received as consideration a promissory note, guaranteed by the Federal Government, in the amount of $2,060 (face value), maturing on December 31, 2007, at the 91-day CETES rate, plus 1.65% from October 1, 1996 to January 15, 1997, and at the 91-day interbank interest rate (TIIE), from January 16, 1997 through maturity. Interest for the October 1, 1996 - December 31, 1997 period was capitalized on a quarterly basis. Beginning January 1, 1998, accrued interest was paid quarterly on the last business day of the respective quarter. At December 31, 2006 and 2005, loan rights transferred to FOBAPROA consisted of the following:

2006 2005 Rights to the gross

portfolio amounts

Rights to the gross portfolio amounts

Loan to FOBAPROA in Mexican pesos $ 25,876 $ 26,953 Checking account in the name of the trust, reflecting cash

flows generated from the loan portfolio transferred to FOBAPROA (3,867) (3,402)

Hedging derivative instruments position - 2 FOBAPROA loan, net $ 22,009 $ 23,553

The net worth of the trust transferring the flows is recorded in memorandum account “FOBAPROA transactions - committed amounts”, and represents the amount of liquid resources and other goods and rights received, which have yet to be delivered to FOBAPROA. At December 31, 2006 and 2005, the balance was as follows:

2006 2005 Checking account in the name of the trust, reflecting cash

flows generated from the loan portfolio transferred to FOBAPROA $ 3,867 $ 3,402

12 Loan portfolio flow participation program and portfolio assignment In September 1997, the Commission issued an official letter to the Bank, establishing the recording, valuation, presentation and disclosure rules applicable to transactions with FOBAPROA under the so-called Loan Portfolio Flow Participation Program (the “Program”). The Commission ruled that the Program does not represent a sale of assets since the Bank keeps the portfolio collection rights, partially guarantees the promissory notes received as consideration and undertakes to deliver the flows received from the collection of the portfolio to FOBAPROA. Consequently, the Bank recorded the loan portfolio and the foreclosed assets whose flows were assigned, on trust, to FOBAPROA, under the established trusts, and the obligation to deliver such flows. The respective assets and liabilities are presented net in the financial statements, showing only the promissory notes and the collection rights received as consideration.

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On March 24, 1999, an agreement was executed between the Bank (as Trustor and Trustee), Banco de México (as the FOBAPROA trustee) as beneficiary and IPAB, in which it was agreed that as of January 20, 1999, the references made to Banco de México in the contracts, agreements and related instruments (as the FOBAPROA trustee) are understood as referring to IPAB. Consequently, the ownership of the rights and obligations previously held by the FOBAPROA correspond to IPAB as of the aforementioned date. Agreements with IPAB (Banca Serfin) - On April 6, 2000, as part of the measures adopted by Banca Serfin and its former stockholders (the “IPAB”) for capitalization purposes, a debt restructuring agreement was executed between Banca Serfin and the IPAB, which modified the terms and agreements of the IPAB credit instruments. Under this restructuring agreement the IPAB acknowledges its debt to Banca Serfin for the amount of $100,084 (face value), and establishes that three payment instruments are subscribed for three promissory notes, which were totally settled during the years 2000, 2001, 2002 and 2003. Transfer of the loan portfolio cash flow rights to Banorte - In October 1999, according to the Bases for Bidding, as instructed by IPAB, and as a result of the public bidding process, Banca Serfin’s Trust department selected Banco Mercantil del Norte, S.A. (Banorte) to supervise the management, recovery and collection of the loans and assets included in the commercial and mortgage portfolio, whose cash flow rights had been transferred by Banca Serfin to IPAB through the transactions known as Tranche I and II and Mortgage Portfolio Tranche III in the net amount of $20,873 (face value). Banorte proposed that Banco del Centro, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte (Bancen), should collect and manage such portfolio. The contract was formalized on February 28, 2000, and is in effect for four years. On April 14, 2000, Banca Serfin, the Trustee, Bancen and MXLQ, S. de R.L. de C.V. (MXLQ) executed a contract for the Partial Assignment of Rights and Provision of Collection and Administration Services of the Assignment Contract (the Partial Assignment Contract) in which Bancen assigns to MXLQ, contract rights solely and exclusively in relation to the mortgage loans indicated in the Partial Assignment Contract for $4,769 (face value), on the understanding that Bancen still has its obligations to Banca Serfin under the same terms and conditions as in the Assignment Contract, with MXLQ assuming the status of joint and several obligor. The Contract dated February 28, 2000 was amended on October 9, 2003 (the Amendment Agreement) to definitively adjust the portfolio, assets and investments delivered by the trust management to Bancen, and certain issues related to the management of the assets were also adjusted. Furthermore, in the Amendment Agreement, Bancen expressly agreed with Banca Serfin to hold the Institution harmless from any action, claim or liability of any kind filed or brought against Banca Serfin or its officers, as a result of any act or event occurring subsequent to February 28, 2000. Additionally, the Amendment Agreement establishes that any and all expenses and costs generated in relation to judgments issued prior to February 28, 2000 will be payable from the assets held in the trust managed by the respective fiduciary area of Banca Serfin, depending on the asset in question, without affecting the participation of Bancen. Furthermore, Bancen, Banca Serfin and its fiduciary area agreed to grant the broadest release allowed by law with effects retroactive to February 28, 2000, and waive the right to any further action or compensation against Bancen, Banca Serfin or its fiduciary area. In regard to the assignment of loan portfolio flow rights to Banorte and MXLQ, pursuant to the contract and amendment agreement, by the fourth anniversary of the signing date of each contract, no credit or additional credit, as the case may be, will remain on the books of Banca Serfin (in its capacity as trustee). The Bank currently has the fiduciary obligation for the cash flows deposited in Serfin checking accounts in the name of the trust, and the obligation to receive from Banorte and MXLQ the flows which both companies manage in the name of the trustee, for the recovery of the assets assigned under administration, receive information on the portfolio assigned under administration to such institutions, and send such information to IPAB.

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IPAB and trust signed an agreement which settles a deferment of the cession contract effect for two years, which concluded as of May 2006. IPAB has been in contact with the Trustee to extend the effective term of the assignment contract with Bancen for a one-year period; the terms and conditions of such contract extension are currently being defined. In conformity with the contract and the respective amendment agreement, on the fourth anniversary of the contract's execution, MXLQ sold the remaining portfolio, which was still under administration. Accounting for FOBAPROA Flow Participation Program - The Bank’s management believes that in relation to the assignment of loan portfolio flow rights to Banorte, the Bank only has the fiduciary obligation for the cash flows deposited in the Bank's checking accounts in the name of the trust, and the obligation to receive from Banorte information on the portfolio assigned under administration to such institution, and send such information to IPAB. This is in accordance with management contracts, where Bancen and MXLQ are responsible during the term of this contract for keeping accounting books for installations independent in relation to the credits, any additional credits, and their own assets, collection-related assets, and, if applicable, their own additional assets, which must be in accordance with NIF. Such documentation and information referred to in this paragraph will be the property of the Trustee and the Bank, as the case may be. Pursuant to the contracts and that set forth in the preceding paragraph, management believes that the current procedure followed in the FOBAPROA Trusts managed by the Bank, of only recording checkbook movements and the yields generated is adequate since Bancen, as the legal representative of the Bank and MXLQ, is responsible for keeping accounting records. As of December 31, 2006 and 2005, the Bank has recorded balances of assets assigned under administration and treasury balances in memorandum accounts. Through document number 601-II-8383 dated November 24, 2004, the Commission ruled that the accounting mechanism utilized by the Bank is adequate. The balances shown in the financial statements of the trusts created to manage FOBAPROA portfolio equity schemes at December 31, 2000 and subsequent periods are still subject to valuation. Notwithstanding, the Bank’s management believes that such balances will have a significant effect on the equity of the Financial Group.

13 Allowance for loan losses

As of December 31, 2006 and 2005, the allowance for loan losses was $4,255 and $3,518, respectively, and had been assigned as follows:

2006 Current Past-due Assigned portfolio portfolio Allowance

Commercial and financial entity portfolio $ 895 $ 280 $ 1,175 Mortgage loans 596 248 844 Credit cards and consumer loans 420 1,814 2,234 Other past due debts - 2 2 $ 1,911 $ 2,344 $ 4,255

2005 Current Past-due Assigned

portfolio portfolio Allowance Commercial and financial entity portfolio $ 969 $ 549 $ 1,518 Mortgage loans 698 279 977 Credit cards and consumer loans 259 761 1,021 Other past due debts - 2 2 $ 1,926 $ 1,591 $ 3,518

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As of December 31, 2006 and 2005, the Financial Group maintained an allowance for loan losses equivalent to 181% and 221% of the past-due portfolio, respectively. The allowance for loan losses resulting from the loan portfolio classification at December 31, 2006 and 2005, recorded in the same year, together with the additional allowances required and those established for the UDI trusts, were classified as follows:

2 0 0 6 2 0 0 5 Classification Classification of the portfolio Amount of the portfolio Amount by degree of reserve by degree of reserve

Degree of credit risk of risk recorded of risk recorded

A $ 167,345 $ 811 $ 121,826 $ 604 B 7,940 593 6,630 388 C 1,119 489 2,462 668 D 2,078 1,527 991 722 E 132 132 117 117

Base classification portfolio 178,614 3,552 132,026 2,499

Unclassified portfolio (includes factoring portfolio) - 1 178,614 132,027

Portfolio excluded (includes IPAB and government agencies with federal government guarantee, among others) 45,108 52,791

Total portfolio 223,722 184,818

Less- Third-party guarantees and credit openings (11,125) (8,536) FOBAPROA checkbook (3,867) (3,402) Net position of commercial portfolio hedging derivatives (36) (19) Net position of FOBAPROA and IPAB hedging derivatives - (6) Interest collected in advance on factoring operations and

eliminations (135) (113)

Loan portfolio, net $ 208,559 $ 172,742

Reserves resulting from the mortgage portfolio restructuring process 568 660

Additional reserves 135 359

Total allowance for loan losses $ 4,255 $ 3,518

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The Financial Group maintains additional reserves, which include the cost of the loan portfolio support programs. Following is an analysis of the movement of allowances for loan losses for the years ended December 31, 2006 and 2005 (face value):

2006 2005 Opening balances as of December 31, 2006 and 2005 $ 3,377 $ 3,924 Provisions (applications) with a charge (credit) to-

Results 2,846 383 Recoveries credited in results from prior years (130) (122) Foreclosed transfers (25) (19) Applications and reductions (2,424) (1,236) Exchange result 1 (17) Support program (72) (68) Recoveries 657 522 Cancellation of value-added tax, insurance and other 25 10

Closing balances as of December 31, 2006 and 2005 $ 4,255 $ 3,377

14 Other receivables, net

Following is an analysis of the allowance for loan losses (face value) as of December 31, 2006 and 2005:

2006 2005 Debtors due to liquidation of operations $ 15,334 $ 11,692 Other debtors 1,424 1,566 Employee loans 1,599 1,623 Recoverable taxes 115 68 Other accounts receivable 291 280

18,763 15,229 Allowance for doubtful accounts (694) (662)

Total $ 18,069 $ 14,567

15 Foreclosed assets, net

As of December 31, 2006 and 2005, foreclosed assets were as follows:

2006 2005 Foreclosed real estate $ 375 $ 383 Foreclosed other assets, securities and rights 2 9 Real estate under promise-to-sell agreements 25 23 402 415 Less- Allowance for losses on foreclosed assets (260) (302)

Total $ 142 $ 113

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The movements of the allowance for the drop in value of personal and real property, values and rights to foreclosed assets are summarized below (at face values) for the years ended December 31, 2006 and 2005:

2006 2005 Opening balance $ 290 $ 344

Allowance - 5 Recalculation of estimates based on profits from the sale of

foreclosed assets 4 - Reimbursement of credit reserves 25 19 Application of losses on sale of foreclosed assets (28) (54) Release of reserves for sale of foreclosed assets (31) (24)

Closing balance $ 260 $ 290

16 Property, furniture and fixtures, net As of December 31, 2006 and 2005, property, furniture and fixtures and installation expenses were as follows:

2006 2005 Properties for office use $ 3,697 $ 3,869 Fixtures 2,364 1,814 Computers 260 595 Office furniture 774 916 Communication equipment 126 294 Peripheral computer equipment 407 430 Vehicles 58 46 Other 37 23 7,723 7,987 Less-

Accumulated depreciation and amortization (2,709) (3,198)

Total property, furniture and equipment, net $ 5,014 $ 4,789 The annual depreciation and amortization rates were as follows:

Rate Properties for office use 2% to 5% Office furniture 10% Computers 25% Peripheral computer equipment 25% Vehicles 20% Communication equipment 20% Fixtures 10% Other 10% and 20%

The Management of the Financial Group as of December 31, 2006 and 2005 recognized a drop of $140 and $53, respectively, in the value of the real property intended for sale, which is recorded under the heading of “Other expenses” in the consolidated statements of income.

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17 Investments in shares As of December 31, 2006 and 2005, investments in shares were as follows:

Percentage of equity

Institution in 2006 2006 2005

Seguros Santander, S.A. 99.99% $ 522 $ 582 Sociedad de Inversión Básica 2 0.012% 523 475 Servicio Panamericano de Protección,

S.A. de C.V. (SERPAPROSA) 20.19% 256 256 Other investments - 189 166 Investment funds managed - 76 54 Sociedad de Inversión Básica 1 0.0146% 58 53 $ 1,624 $ 1,586

At December 31, 2006 and 2005, equity held in the results of subsidiaries and associated companies is as follows:

Institution 2006 2005 Seguros Santander, S.A. $ 139 $ 56 Sociedad de Inversión Básica 2 65 48 Servicio Panamericano de Protección, S.A. de C.V.

(SERPAPROSA) 12 25 Otras inversiones 53 49 Sociedades de inversión administradas 9 5 Sociedades de Inversión Básica 1 6 5 Acumulated amortization of goodwill (67) (66) $ 217 $ 122

18 Other assets

As of December 31, 2006 and 2005, deferred charges and intangibles were as follows:

2006 2005 Investments of the pension plan and seniority premiums of the

Brokerage House and Almacenadora Somex $ 40 $ 37 Provisions for employee benefits (33) (29)

Net Investments of the Brokerage House and Almacenadora Somex 7 8

Advance payments 261 226 Software and technological developments 2,064 1,558 Guarantee deposits 54 18 Intangible assets from the pension plan 316 375 Intangible assets from BOFA operation 153 - Other assets - 16 2,848 2,193 Less-

Accumulated amortization of other assets (1,049) (752) Net 1,799 1,441

Total $ 1,806 $ 1,449

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Amortization rates are as follows:

Annual amortization rates

Software 33.33%

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. The performance of the share and asset acquisition transaction described in Note 29 generated an intangible asset which the Institution valued at $153 ($149 face value), which is presented under the “Other assets” heading. This amount will be amortized over 10 years beginning March 2006.

19 Goodwill As of December 31, 2006 and 2005, goodwill consisted of:

2006 2005

Afore Santander, S.A. de C.V. $ 844 $ 844 Seguros Santander, S.A. 410 410 ASIGNA trust 14 14 Banca Privada BOFA 45 - Less- Accumulated amortization (532) (465) $ 781 $ 803

The charge to income for the year in 2006 and 2005 for goodwill amortization was $67 and $66, respectively. In March 2003, the Bank acquired 24.99% of the shares that it did not own of Santander Mexicano, S.A. de C.V. Afore (Afore) from Santander Investment, Ltd. The acquisition price was $880 (face value) and exceeded the book value of such shares by $726 (face value), which was recorded as goodwill. Management performed an impairment test on the carrying amount of the goodwill and noted no issues. Notwithstanding, in February 2004, through document number 601-II-8314, the Commission informed the Financial Group that such goodwill must be amortized over a 20-year period. Consequently, amortization of the amount of $28 (face value) was determined from its date of origin to December 2003 and applied to retained earnings, while the amortization applicable in 2004 was applied to income of that year.

20 Foreign currency position As of December 31, 2006 and 2005, foreign currency assets and liabilities of the Financial Group were as follows:

Millions of US Dollars 2006 2005

Assets 11,495 6,972 Liabilities (11,770) (7,063)

Liability position, net (275) (91)

Mexican peso equivalent (face value) $ (2,973) $ (968)

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As of December 31, 2006 and 2005, the “Fix” (48-hour) exchange rate used was $10.8116 and $10.6344 per US dollar, respectively. As of January 17, 2007, the unaudited foreign currency position was similar to that in effect at year-end, and the “Fix” exchange rate was $10.9234 per US dollar. Banco de México sets the ceilings for foreign currency liabilities and the liquidity ratio that the Financial Group obtains directly or through its foreign agencies, branches or affiliates, which must be determined daily for such liabilities to enable the Bank to structure their contingency plans and promote longer term funding within a reasonable time frame. The Bank 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. The foreign currency position of the other subsidiaries is not material.

21 Deposits The instruments used by the Bank 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 2006 and 2005 year-end funding rates were as follows:

2006 Year-end rates

2005 Year-end rates

Mexican Foreign Mexican Foreign Accounts pesos UDI currency pesos UDI currency

Demand deposits-

Checking accounts From 0.05% to 7.02% -

From 0.50% to 2.05%

From 0.10% to 8.02% -

From 1.00% to 2.10%

Time deposits-

Fixed-term deposits From 0.15% to 7.39% 1.49%

From 1.80% to 2.75%

From 3.20% to 6.90%

From 0.15% to 3.00%

From 1.65% to 2.60%

Cedes From 3.50% to 6.20% -

From 4.10% to 5.10%

From 5.05% to 7.90% -

From 0.50% to 2.61%

As of December 31, 2006 and 2005, time deposits consisted of the following:

2006 2005 Notes with interest payable at maturity $ 122,551 $ 140,939 Fixed-term deposits 7,275 8,444 Foreign currency time deposits 7,200 8,050 $ 137,026 $ 157,433

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As of December 2006, maturities of promissory notes with interest payable upon maturity denominated in Mexican pesos fluctuate between 4 and 371 days and the annual closing rates were within 0.15% and 7.30% for promissory notes from 4 to 366 days and within 0.15% and 7.39% annually for promissory notes established for periods of between 4 to 368 days, and within 0.15% and 7.20% annually for promissory notes of longer duration. Deposits in the foreign branch are stated at their placement value plus accrued interest, which is calculated by the straight-line method. The difference between the placement value and the certificate’s face value is recognized in results over the instrument’s life.

22 Bank and other loans

As of December 31, 2006 and 2005, bank loans were as follows:

2006 2005 Mexican Foreign Mexican Pesos currency Total Pesos

Demand loans- Banco de México $ - $ - $ - $ 2,947 Received call money transactions 1,475 - 1,475 799 Creditor bank compensation 3,954 - 3,954 852 Bank loans for discounted portfolio 64 - 64 56 Loans with development banks 2 - 2 4

Total demand loans $ 5,495 $ - $ 5,495 $ 4,658

Short-term portion-

Banco de México $ 100 $ - $ 100 $ 17,906 Loans undertaken in Mexico - 390 390 12 Loans undertaken by foreign

branches - 36 36 50 Loans on discounted portfolio 895 12 907 629 Public fiduciary fund loans 965 87 1,052 1,334 Federal Government loans - - - 4

Total short-term loans $ 1,960 $ 525 $ 2,485 $ 19,935

Long-term portion-

Loans undertaken in México $ - $ 15 $ 15 $ 26 Loans undertaken by foreign

branches - 336 336 373 Loans on discounted portfolio 116 18 134 114 Public fiduciary fund loans 1,720 73 1,793 2,610 Federal Government loans - - - 1

Total long-term loans $ 1,836 $ 442 $ 2,278 $ 3,124

Total interbank loans and loans

with other public entities $ 9,291 $ 967 $ 10,258 $ 27,717

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Loans with Banco de México - At December 31, 2006, the Bank has 28-day Interbank Interest Rate (TIIE) loans of $100 contracted at the year-end close rate of 7.40%. Loans with national banks (not including accrued interest) - As of December 31, 2006, call money transactions performed by Treasury are used to cover liquidity and position leveling needs, which accrue interest at market rates of between 6.90% and 7.00% in Mexican pesos and between 5.13% and 5.38% in US dollars. Creditor bank compensation - Is represented by checking accounts opened by customers in Mexican pesos which, for regulatory reasons, are presented under the heading of bank and other entity loans. At December 31, 2006, this amount is primarily composed by the account of Deutsche Bank for the amount of $3,733. Loans on discounted portfolio - 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 grant their customers loans for financial support in Mexican pesos and US dollars. Development Bank loans - In order to support customers, the Financial Group currently carries out transactions with NAFIN and BANCOMEXT. 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 authorization of the internal risk unit of the Financial Group. 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. 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), Mining Development Trust (FIFOMI) and the National Tourism Development Fund (FONATUR).

23 Comparative maturities of principal assets and liabilities The maturities of the significant assets and liabilities held as of December 31, 2006 were as follows:

Up to 1 to Over 1 year 5 years 5 years Total Assets: Funds available $ 81,674 $ - $ - $ 81,674

Trading securities 36,731 - - 36,731 Securities available for sale - 308 - 308 Securities held to maturity 424 862 3,941 5,227 Debit balances under repurchase and resale agreements 1,974 - - 1,974 Derivative financial instrument transactions 6,127 22,972 18,929 48,028 Current loan portfolio, less FOBAPROA loan 90,880 68,627 24,699 184,206 FOBAPROA loan 22,009 - - 22,009 Other receivables (net) 16,379 591 1,099 18,069

Total assets $ 256,198 $ 93,360 $ 48,668 $ 398,226

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Up to 1 to Over 1 year 5 years 5 years Total Liabilities:

Demand deposits $ 104,403 $ - $ - $ 104,403 Time deposits 137,026 - - 137,026 Bank and other loans 7,980 1,536 742 10,258 Credit balances under repurchase and resale agreements 2,764 - - 2,764 Derivative financial instrument transactions 7,837 21,419 16,630 45,886 Sundry creditors and other payables 34,825 - - 34,825 Subordinated debentures - - 3,280 3,280

Total liabilities $ 294,835 $ 22,955 $ 20,652 $ 338,442

Assets less liabilities $ (38,637) $ 70,405 $ 28,016 $ 59,784

(a) The heading of Funds available includes monetary regulation deposits with Banco de México. Such

deposits as of December 31, 2006 are $33,069, and cannot be disposed of freely. 24 Related-party transactions and balances

Transactions are carried out among the companies of the Financial Group, 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. As of December 31, 2006 and 2005, accounts receivable from and payable to related companies were as follows:

2006 2005 Funds Available $ 46 $ - Call money (asset) $ - $ 6,947 Transactions with derivative financial instruments (asset) $ 9,275 $ 1,460 Accounts receivable $ 196 $ 148 Call money (liability) $ 4 $ 2 Debit balances under repurchase agreements $ 746 $ - Transactions with derivative financial instruments (liability) $ 6,883 $ 5 Demand deposits $ 21 $ 4 Time deposits $ 188 $ - Accounts payable $ 1,722 $ 1,021 Dividends payable $ 750 $ - Subordinated debentures $ 3,280 $ 3,355

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The most significant transactions carried out by the Financial Group with related and affiliated companies (at face values) were as follows:

2006 2005 Revenues-

Interest $ 78 $ 108 Commissions $ 503 $ 340 Rent $ 2 $ 2 Gain from derivative financial instrument transactions $ 3,489 $ 1,708 Corporate services $ 27 $ 18

Expenses-

Interest and commissions $ 475 $ 294 Technical assistance $ 803 $ 597

The Financial Group executed professional service agreements with América Latina Tecnología de México, S.A. de C.V. (ALTEC), which as of March provides systems development and operation services, among others. Also, the Financial Group acquired software developed by ALTEC for $609 and $365 in 2006 and 2005, respectively.

25 Labor benefits Under Mexican Labor Law, the Financial Group 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 Financial Group records the net periodic cost to create a fund that covers the net projected obligation from seniority premiums and pensions 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 being accrued which at present value will cover the obligation from benefits projected to the estimated retirement date of the Financial Group’s employees. On January 1, 2005, the Financial Group adopted the new provision of Bulletin D-3, Labor Obligations (“D-3”), related to the recognition of the liability for severance paid at the end of the employment relationship for reasons other than restructuring, which are recorded using the projected unit credit method, based on calculations performed by independent actuaries. The accumulated liability as of January 1, 2005, determined by independent actuaries, is $330 (face value), which the Group elected to recognize as a transition liability, and is amortized using the straight-line method over the average remaining years of service of the workers expected to receive such benefits, which is 10 years. Based on the current collective bargaining agreements and individual employment contracts, the Financial Group has a liability for postretirement benefits that requires the full payment of certain medical expenses of such employees after they retire, and of their retirees and family members based on the respective contracts. The Bank has a defined contribution pension plan, 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 decided to adhere to the new plan, which was optional for them. As of December 31, 2006 and 2005, approximately 8.3% and 11% (unaudited) of the Bank’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 that date the investment fund of the defined contribution pension plan was $2,989 and 2,589, respectively.

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During 2006, the Bank modified its pension plan operating scheme by creating a Medical Coverage upon Retirement sub-account. The effect of this pension plan modification generated a gain of $5 (representing a saving in the net periodic cost of $35 and a cost from the effect of reducing obligations of $30), which was recognized in the results of the year as a reduction of expenses of the period, which was recorded under the “Administration and promotion expenses” heading, while a reduction of $144 was recorded under the Obligation from Projected Benefits. At December 31, 2006, approximately 27.2% (unaudited) of the Institution's employees were transferred to the new Medical Coverage upon Retirement sub-account. As of December 31, 2006 and 2005, the Bank amortizes variances based on the estimate of 15.78 and 16.28 years for the pension plan for retirees, 14.98 and 15.47 years for seniority premiums and 17.30 and 18.17 years for post-retirement medical services, based on the average remaining years of service of the Bank’s employees. As of December 31, 2006 and 2005, balances and activity reflected in employee benefits from defined benefit plans of entities that comprise the Financial Group, which include pension plans, seniority premiums, medical expenses and severance payments, were as follows:

2006 2005 Projected benefit obligation $ (4,413) $ (4,305) Plan assets 3,044 2,659

Fund status (1,369) (1,646) Transition liability 392 489 Unrecognized actuarial losses 781 987

Net projected liability $ (196) $ (170) As of December 31, 2006, the net projected liability for severance payments at the end of the employment relationship for reasons other than restructuring, is $38. As of December 31, 2006 and 2005, current benefits obligations (OBA) are $1,964 and $1,765 (face value), respectively. Net periodic cost consists of the following:

2006 2005 Service cost for the year $ 148 $ 169 Amortization of transition liability 70 72 Financial cost 222 223 Less- actual return on fund assets (188) (175) Actuarial losses 24 37 Effect derived from medical expense plan changes 30 - Inflationary adjustment of purchase cost 12 9

Net periodic cost $ 318 $ 335

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The economic assumptions used were as follows:

2006 2005 Discount rate 5.7% 5.5% Expected rate of return of the assets 7.50% 7.50% Rate of wage increases 1.00% 1.00%

In July 2001, the Company executed a collective lifetime payment insurance operation agreement for certain retirees with Principal México Compañía de Seguros, S.A. de C.V. (the Insurance Company). Such agreement establishes that with the payment of the single premium by the Group, the Insurance Company commits to paying insured retirees a lifetime payment until the death of the last insured retiree. Under such agreement, the Group’s net worth would not be affected in the future by these insured persons, since the risk was transferred to the Insurance Company. However, in order to record the Group’s legal obligation to its retirees in the consolidated balance sheets, the Group records the projected benefit obligation of the insured retirees surrendered to the Insurance Company under the heading of “Employee retirement obligations”, and a long-term account receivable with the Insurance Company, which is recorded under the heading of “Other assets” for the funds that it transferred thereto. The amount of the projected benefits obligation was calculated by the Group'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, 2006 and 2005, such liability is $909 and $920 (face value), respectively, and is recorded separately under the heading of “Sundry creditors and other payables”, which for presentation purposes is eliminated against the equivalent balance under the heading of “Other assets”. The reserves for employee benefits net of the contributions to the fund, with the exception of the Brokerage House and Almacenadora Somex, are presented in the consolidated balance sheets under “Sundry creditors and other payables”. Also, as of December 31, 2006 and 2005, the Financial Group recorded an additional liability of $494 and $534 (face value), respectively, an intangible asset of $316 and $375, respectively, and a charge to stockholders’ equity for the difference of $178 and $181, respectively, net of the restatement effect, which occurred since the actual net liability exceeded the projected net liability and the recognition of the current benefit obligation. Such additional liability is included in the account named “Provisions for sundry obligations” under the heading of “Sundry creditors and other payables”. The changes in net projected obligations were as follows:

2006 2005 Opening balance (face value) $ (165) $ (156) Actuarial adjustment (5) (4) Payment of benefits 102 110 Provision for the year (288) (335) Contributions for the year 190 215 Effect from the change of pension plan (30) -

Net projected liability $ (196) $ (170)

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Fund movements were as follows:

2006 2005 Opening balance $ 2,553 $ 2,309 Contributions 190 215 Actual return on plan assets 463 301 Payments made (244) (234) Transfer to defined contribution plan (28) - Transfer of reserves 21 - Effect of restatement 89 68

Closing balance $ 3,044 $ 2,659 As of December 31, 2006, there is no fund created for severance payments at the end of the employment relationship for reasons other than restructuring.

26 Sundry creditors and other payables

As of December 31, 2006 and 2005, sundry creditors and other payables were as follows:

2006 2005 Employee retirement obligation provision $ 3,207 $ 2,800 Funds (3,004) (2,622)

Net 203 178

Provisions for sundry obligations 4,908 4,687 Other creditors 2,064 1,928 Cashier checks and certificates 741 558 Letters of credit and drafts payable 71 129 Value added tax payable 339 222 Other obligations 586 581 Operation liquidation creditors 21,447 15,470 Declared dividends 750 - Creditors from liquidation of operations 3,716 1,624

$ 34,825 $ 25,377

The line item provision for sundry obligations includes reserves for tax, labor and legal contingencies established by the Financial Group at year-end. Variable benefit payment agreement- As of 2005, the Management of the Financial Group and certain subsidiaries have established a payment plan to certain employees for the period 2005-2007, linked to the stock market valuation and earnings per share of the holding company Banco Santander Central Hispano, S.A. (BSCH), and to meeting certain targets in the different entities. However, to qualify for such payment certain conditions must be fulfilled, as established in the agreement. Furthermore, the Financial Group and subsidiaries established a hedge contract with BSCH, whereby the latter agrees to assume the cost of such payment in exchange for the payment of a hedge premium. The Financial Group and subsidiaries paid the cost of the hedge for the respective year, which was $21, applied to results of the year.

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27 Tax environment Income and assets tax regulations - The Financial Group is subject to income tax (ISR) and tax on assets (IMPAC). ISR is calculated by taking into consideration certain taxable and deductible effects of inflation, such as depreciation calculated on restated asset values, and taxable income is increased or reduced by the effects of inflation on certain monetary assets and liabilities through the annual inflationary adjustment. The corporate rate for 2006 was 29%. In accordance with changes to income tax rates, the rate will decrease to 28% in 2007. IMPAC is computed at an annual rate of 1.8% on the net average of assets subject to intermediation (at restated values) and certain liabilities, and the tax is paid only when exceeding ISR of the period. Any required payment of IMPAC can be recovered against excess ISR paid over IMPAC in the following ten years. As of January 1, 2007, the IMPAC rate will be 1.25%; debts that could be deducted from the tax basis prior to this amendment are no longer deductible. The provision for ISR, IMPAC and Employee Profit Sharing (PTU) consists of the following:

2006 2005

Current: ISR $ 310 $ 377 IMPAC 200 199 PTU 52 33

Deferred: $ 562 $ 609

ISR $ 3,513 $ 1,177

Value added tax - Under applicable amendments, during 2006 and 2005, value added tax was determined based on cash flows, while interest is determined on an accrual basis. Reconciliation of book and taxable income - The principal items affecting the Group’s taxable income were the annual inflationary adjustment, provisions, the difference between the accounting and tax depreciation and amortization of fixed assets and fixtures and the deduction of the tax liability based on credit risk reserves, which have different treatment for book and tax purposes. At December 31, 2006, the amount shown as the income tax provision in the income statement primarily refers to the reversal of the deferred tax on assets incurred by the Bank and the income tax provisions of Afore (a subsidiary of Banco Santander), Gestión Santander and Casa de Bolsa Santander. Tax loss carryforwards and recoverable IMPAC - As of December 31, 2006, the Financial Group and its subsidiaries had tax loss carryforwards for ISR purposes and recoverable IMPAC, which will be adjusted for inflation through the year applied or recovered, as the case may be, for the following restated amounts:

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Expiration Tax

loss Recoverable carryforwards IMPAC

2007 $ - $ 29 2008 84 28 2009 - 31 2010 1,166 22 2011 1,460 29 2012 - 28 2013 - 31 2014 - 33 2015 3 35 2016 1 43

Total $ 2,714 $ 309

Employee statutory profit-sharing- The companies determine their profit-sharing by following the treatment based on the guidelines established in the Mexican Constitution, except for Afore and Gestión Santander México, which apply article 127 III of the Federal Labor Law. Deferred taxes- As of December 30 1, 2006 and 2005, deferred taxes consist of the following:

2006 2005

Deferred ISR asset: Effect of tax loss carryforwards, net of FOBAPROA effect $ 760 $ 3,793 Undeducted allowances for loan losses 5,921 6,341 Employee obligations 60 5 Fixed assets and deferred charges 265 177 Accumulated liabilities 264 233 Other 1 -

Deferred ISR asset 7,271 10,549 Deferred ISR (liability):

Net FOBAPROA effect (2,679) (2,801) Gain from financial instruments (1,490) (796) Prepaid expenses (33) (8) Other - (204)

Deferred ISR liability (4,202) (3,809) Recoverable IMPAC 309 222 Less - reserve (5,946) (6,029) Deferred tax (liability) asset (net) $ (2,568) $ 933

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The Management of the Financial Group records a reserve 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 over the short-term (one year), 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 by using results or stockholders’ equity as the corresponding account, depending on how the item underlying the anticipated deferred tax was recorded. During 2005, the Financial Group’s Management recognized the effect of deferred tax assets derived from reserves established for credit risks, which were applied to the “Retained Earnings” account, since the creation of such provisions was recognized in the aforementioned account in prior years. The main items affecting the 2005 reconciliation of the legal and effective income tax rates were: permanent differences and the effects derived from the tax liability due to allowance for loan losses created for non-deductibe credit risks that were not recognized in prior years. Tax reviews and issues – Banco Santander 1. From a constitutional standpoint, the Institution has considered that the amendments made to the Value

Added Tax Law (IVA) during 1999, 2000, 2001 and 2002 contain defects that generated a material negative effect for the Financial Group. Consequently, during these years, it applied the law in effect during 1998, which enabled it to identify IVA paid for subsequent credits. On November 18, 2005, the Institution received notification from the Tax Administration Service regarding the IVA difference determined for 2002. Accordingly, on February 7, 2006, the Institution filed a proceeding for annulment with the Regional Metropolitan Courts of the Federal Tax Court. On August 10, 2006, the Institution received notification of the lawsuit filed by the defending authority. The Institution, subsequently filed additional arguments to challenge the lawsuit filed by the defending authority. The Institution is currently waiting for the Regional Tax Court to send this case to the High Court of the Tax Court. The Management of the Institution believes that there are sufficient elements to successfully defend this opinion. However, as in any lawsuit, the outcome cannot be guaranteed, so it decided to record a reserve for this matter.

2. At the present date, Management has quantified the tax effects derived from the portfolio held in trust; these tax effects have also affected deferred taxes.

Brokerage House- 1. In June 2001, the Brokerage House filed a proceeding for annulment with the Federal Tax Court

against the ruling contained in Official Letter 330-SAT-V-5319 dated March 20, 2002, issued by the Taxpayers’ Inspection Office for Entities that Consolidate for Tax Purposes and the Financial Sector, assessing restated income taxes, surcharges and fines of $107 for 1996. Given the amount involved, this case was sent to the High Court of the Federal Tax Court, which enabled the tax authorities to consult the new evidence submitted by the Brokerage House. Through the verdict on January 27, 2006 the Federal Tax Court overturned the challenged ruling.

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Favorable veredict regarding IVA- At December 31, 2005, the Institution had recoverable IVA balances dating from 1995, 1997 and 1998. Once these amounts are recovered, they will have to be returned to IPAB, net of the respective tax effects, as required by the share purchase-sale contract executed by Grupo Financiero Serfin, S.A. (an entity merged with Grupo Financiero Santander, S.A.B. de C.V.) with IPAB. During 2006, the Institution recovered IVA dating from 1995, 1997 and 1998, for the amounts of $1,006, $172, and $187, respectively, which was returned to IPAB net of tax effects. The tax effect of $494 derived from this recovery was recorded in the “Other expenses” account.

Other tax issues- As of December 31, 2006 and 2005, the following balances exist in the relevant tax indicators:

2006 2005 Capital contribution account $ 91,805 $ 88,296 Net tax income account 3,942 2,875

In order to determine the balance of the net tax income account, the Institution considered the applicable legal provisions of the Income Tax Law in effect until December 31, 2001.

28 Preferential unsecured subordinate debentures freely convertible to shares

During 2006 and 2005, the Bank issued US $300,000,000 in preferential unsecured subordinated debentures, freely convertible to shares by the holder. These issues are private and the buyers of the entire issue were the current shareholders of the Financial Group. Based on the characteristics of this issue, they were classified as a liability. These obligations are as follows:

Rate at fifth Issue Amount Maturity Rate anniversary

1 100 Nov. 30, 2014 LIBOR + 1.1 PP LIBOR + 2.2 PP 2 50 Nov. 30, 2014 LIBOR + 1.1 PP LIBOR + 2.2 PP 3 150 Mar. 31, 2015 LIBOR + 1.2 PP LIBOR + 2.4 PP

29 Stock and assets purchase contract On October 10, 2005, the Bank, Gestión Santander México and Central Inmobiliaria de Santiago (CIS- a subsidiary of BSCH) signed a stock and assets purchase contract with Boston Overseas Financial Corporation (Boston), Bank of America México, S.A. (BOFAMEX) and Continental Servicios Corporativos (Continental) foreign amount of US $26,000,000, which may be adjusted as indicated below. This transaction involves the acquisition of the private banking business of Bank of America (BOFA-USA) in Mexico, which basically involves the purchase and sale of shares of an investment fund operator that manages 10 funds, and the assets and liabilities of four restricted-service bank branches which mainly render securities advice to clients from the property and private banking sectors; i.e., they provide advice on securities, purchase and sell securities on account of such clients, and safeguard such securities.

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The Bank, Gestión Santander and CIS paid 5% of the transaction amount on the date the contract was signed. The transaction close will be subject to compliance with certain conditions, including the authorization from the respective authorities. Furthermore, given that the continued status of the clients is a fundamental element of the transaction value, the contract establishes deadlines and reasons for which the price might be adjusted. There is also a transition period of 10 weeks as of the transaction close, in which BOFAMEX will continue to render services to the Bank and to Gestión Santander, at no cost, to ensure continuity to the clients and avoid any interruption of service. As of December 31, 2005, the Financial Group has recorded the amount of US$ 1.3 million under the heading of “Other assets” for the “good faith” deposit paid to the vendor as part of the transaction. On January 27, 2006, the Management of the Institution, Gestión Santander and CIS performed a transaction based on the authorization granted through SHCP document number UBA/DGABM/142/2006. As the Institution paid a transaction amount in excess of book value, an intangible asset was determined, as discussed in Note 18.

30 Stockholders’ equity

As of December 31, 2006 and 2005, capital stock, at par value, was as follows:

Number of shares 2006 2005 2006 2005

Fixed capital Series "F" Shares 1,078,456,241 1,078,456,241 $ 4,078 $ 4,078 Series "B" Shares 1,739,931,948 1,739,931,948 6,578 6,578

Variable capital

Series "F" Shares 1,575,338,959 1,575,338,959 5,956 5,956 Series "B" Shares 805,442,999 805,442,999 3,045 3,045

Total 5,199,170,147 5,199,170,147 $ 19,657 $ 19,657

After approving the financial statements, the Stockholders' Annual Ordinary General Meeting of February 23, 2006, agreed that once the consolidated financial statements were approved by such meeting, reporting a net profit in 2005 of $6,752 (face value), the following applications would be made: a. The individual loss of $128 obtained in the fiscal year would be applied to the "Retained Earnings"

account. b. Of the net profit obtained in the year by its subsidiaries, not distributed or applied, a dividend of

$6,881 (face value) will be applied to the "Retained Earnings" account. The aforementioned Stockholders' Meeting resolved to change the Institution's corporate denomination to Grupo Financiero Santander, S.A. de C.V., subsequently amending Article I of the Corporate Bylaws for such purpose.

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The Stockholders' Ordinary and Extraordinary General Meeting of August 7, 2006, resolved to amend the Institution's corporate bylaws to adapt them to the Decree to Reform, Incorporate and Annul Different Provisions of the Law on Credit Institutions as published in the Federal Official Gazette on December 30, 2005.

Based on the aforementioned amendments, the Company became a Public Stock Company with Variable Capital. Accordingly, Article I of its Corporate Bylaws establishes the following: The Company's denomination is “Grupo Financiero Santander”, which will be followed by the words Public Stock Company with Variable Capital that, in is abbreviated “S.A. B. de C.V”. The Company is an Affiliated Holding Company per Chapter II Third Title of the Law on Financial Groups and the Regulations for Establishing the Affiliates of Foreign Financial Institutions. All the terms defined by these provisions shall have the same meaning in the corporate bylaws. The Ordinary and Extraordinary General Meeting of the Stockholders of the Financial Group of October 24, 2006, resolved to amend its Corporate Bylaws to adapt them to the amendments to the Law on Financial Groups published in the Federal Official Gazette on July 3 and 6, 2006. The aforementioned amendments are currently awaiting Treasury Department authorization. The Stockholders' Ordinary General Meeting of November 30, 2006, resolved to pay a cash dividend of $750 (face value) to the Institution's stockholders from the net tax income account. The Meeting resolved that the aforementioned dividend would be distributed to stockholders based on the number of shares held by each, on the basis of 0.1442537903 M.N, per share. At all times, Series “F” shares shall represent at least 51% of common stock and may only be directly or indirectly acquired by a Foreign Financial Institution, as defined by the Law on Financial Groups (LRAF). Series “B” shares can represent up to 49% of common stock, may be freely subscribed and are subject to the provisions of Article 18 of the LRAF. Foreign corporations that exercise functions of authority may not participate under any circumstances in the capital of the Group. National financial entities cannot do either, including those which form part of the Financial Group, except when they act as institutional investors, pursuant to article 19 of the LRAF. If dividends are distributed without incurring the tax applicable to the Financial Group, such tax must be paid when the dividend is distributed. Therefore, the Financial Group must keep track of profits subject to each rate. Capital reductions will incur taxation on the excess of the amount distributed against its tax value, as set forth in the Income Tax Law. The Group and its subsidiaries, except the Bank and the Insurance Company, are subject to the legal provision whereby at least 5% of net profits each year must be separated and transferred to a capital reserve fund until reaching the equivalent of 20% of paid in common stock. With regard to the Bank, the legal provision requires the creation of a legal reserve equal to 10% of net profits until reaching 100% of paid-in common stock, while for Seguros Santander, the legal reserve is created based on at least 10% of the net profits and turned until reaching 75% of paid-in common stock. The reserve fund cannot be distributed to the stockholders during the existence of the aforementioned entities, except in the form of a stock dividend.

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31 Preventive and 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 funding activities of the applicable month. For 2006 and 2005, the amount of the fund contributions payable by the Bank, as determined by the IPAB, were $1,041 and $1,112, respectively.

32 Contingencies As of December 31, 2006 and 2005, the Financial Group 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 Financial Group’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 financial statements. a. IPAB Hedges:

As of December 31, 2006 and 2005, Grupo Financiero Serfin (which was merged with Grupo Financiero Santander Mexicano, S.A., currently Grupo Financiero Santander) 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 Financial Group and IPAB, as described below. In accordance with this agreement, IPAB undertakes, with Grupo Financiero Serfin, liabilities for any amounts payable as a consequence of any administrative, legal or arbitration proceedings against Grupo Financiero Serfin and/or its financial entities (Banca Serfin, merged with Banco Santander Mexicano, currently denominated Banco Santander, Operadora de Bolsa Serfin, merged with Casa de Bolsa Santander Mexicano, currently denominated Casa de Bolsa Santander, Almacenadora Serfin, Factoraje Serfin, merged with Factoring Santander, currently Factoraje Santander Serfin, and Seguros Serfin, formerly Seguros Serfin Lincoln, the absorbing company of Seguros Santander Mexicano, currently denominated Seguros Santander) filed before the agreement was executed (May 23, 2000) or occurring within a three-year period following this date, which result in a final adverse court decision from a Mexican authority or court, or a foreign court if the decision is ratified in Mexico, or a final arbitration judgment duly ratified and executed in Mexico.

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 million pesos and $91 million pesos (face 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 Financial Group 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.

As of December 31, 2006 and 2005, the amount of the maximum contingencies related to the lawsuits that are covered by the IPAB, without considering those not determined, is $2,602 and $3,512, respectively, for which the Financial Group estimates a contingency of $163 and $526, respectively.

As of December 31, 2006 and 2005, the Financial Group and/or financial entities of the Grupo Financiero have recorded provisions for contingencies related to the operation prior to the acquisition by the Financial Group of $1,093 and $1,070, respectively, which were generated when the IPAB cleaned up Grupo Financiero Serfin and/or financial entities of Serfin (prior to the acquisition by the Group), have been updated and/or applied in accordance with that set forth previously.

Neither Grupo Financiero Serfin nor its financial entities recorded any contingency reserve, in addition to that recorded prior to their acquisition by the Financial Group, in connection with any item generated from transactions performed prior to the transfer date of the shares of Grupo Financiero Serfin to the Financial Group, since IPAB will take the measures mentioned in the preceding paragraphs if any contingency should arise.

b. Fiduciary Area:

As of December 31, 2006, the Bank has recorded a provision of $140 (face value), to cover the contingency derived from the fiduciary area in which the Bank acts as trustee.

The Bank’s fiduciary division is currently analyzing internal documentation. The Bank’s management believes that there will be no additional contingencies that could materially affect the Bank’s consolidated financial statements or those of the Financial Group.

c. Legal contingencies:

At December 31, 2006 and 2005, as a result of its business activities (without considering contingencies derived from hedges with the Bank Savings Protection Institute (IPAB)), the Financial Group 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 financial statements in the event of an unfavorable outcome. At December 31, 2006 and 2005, the Financial Group has recorded contingency reserves for the amounts of $1,042 and $1,060, 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 advisers, management considers to be adequate.

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d. Contingency for Brokerage House

During 2005, one of the legal proceedings filed by the Brokerage House received a negative verdict. Internal and external advisers consider that the Brokerage House has sufficient elements to obtain a favorable verdict regarding the quantification of interest derived from this legal proceeding. Notwithstanding, in October 2006, the Brokerage House received a definitive verdict whereby the quantification of interest as requested by its counterpart is unlawful.

33 Trust or mandate transactions

As of December 31, 2006 and 2005, the Financial Group managed the following trusts and mandates:

2006 2005 Trusts-

Administration $ 96,163 $ 82,684 Guarantee 4,675 5,154 Investment 15,937 14,154

116,775 101,992 Mandates 33,685 1,618

Total trust or mandate transactions $ 150,460 $ 103,610 34 Other income and other expenses

As of December 31, 2006 and 2005, the other income and expenses are as follows:

2006 2005 Other income-

Cancellation of liabilities $ 48 $ 60 Cancellation of contingency reserves 232 40 Recovery of financial instruments - 5 Cancellation of the reserve for special Cetes denominated in long-term UDIS 88 93 Cancellation of asset reserves and other recoveries 32 86 Gain on sale of real estate 16 - Recovery of taxes 1,405 832 Technical advice 32 35 Interest on employee loans 123 171 Recovery of expenses and other 204 270 Supplemental monetary position result - 12 Tax incentive on contribution to the termination rust 210 248

Total other proceeds $ 2,390 $ 1,852

Other expenses- Supplemental monetary position result $ 266 $ - Write offs and losses 385 400 Insolvency from portfolio recovery 199 146 Other 708 226 Provision for legal contingencies 261 696 Provision for drop in real estate value 140 53 Personnel downsizing 58 141 Provisions and payments to IPAB (Indemnity) 987 212 Amortization of investment in termination trust 210 248 Total other expenses $ 3,214 $ 2,122

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35 Commitments As of December 31, 2006 and 2005, the Financial Group has signed agreements for the provision of services (to be received) related to its operations, equal to less than 14% and 15%, respectively, of operating expenses, which form part of its current spending.

36 Segment information As of December 31, 2006, the Financial Group 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 Global Commercial Wholesale Corporate Asset Banking 1 Banking2 Activities Management3 Total Financial margin $ 14,062 $ 2,240 $ 3,432 $ 30 $ 19,764 Allowance for loan losses (2,835) (14) 3 - (2,846) Adjusted financial margin for credit risks 11,227 2,226 3,435 30 16,918 Net commissions 6,007 (56) 394 993 7,338 Trading revenue 184 4,575 (600) 9 4,168 Total operating revenues 17,418 6,745 3,229 1,032 28,424 Administrative and promotional expenses (10,748) (1,485) (1,142) (637) (14,012) Operating income 6,670 5,260 2,087 395 14,412 Other income (expenses), net (190) (656) - 22 (824) Income before ISR and PTU 6,480 4,604 2,087 417 13,588 Current and deferred ISR and PTU (1,988) (1,307) (628) (152) (4,075) Income before equity in results of subsidiaries and associated

companies 4,492 3,297 1,459 265 9,513 Equity in the result in subsidiaries and associated companies - 121 - 96 217 Minority interests income - (2) - - (2)

Net income $ 4,492 $ 3,416 $ 1,459 $ 361 $ 9,728

Relevant balance sheet data: Total credit $ 115,703 $ 42,173 $ 50,608 $ 75 $ 208,559 Customer deposits $ 170,405 $ 8,253 $ 24,974 $ - $ 203,633

(1) Includes Individuals, Small and Medium Businesses, Companies, Institutions and Local Corporate. (2) Includes Global Corporate, Treasury and Investment Banking. (3) Includes Afore, Fund Manager and Insurance.

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Balance Sheet Assets Funds available $ 81,674 Investments in securities 42,266

Total loan portfolio:

Commercial loans 80,923 Financial entities loans 2,817 Consumer loans 52,677 Mortgage loans 16,397 Government loans 33,736 FOBAPROA loans 22,009

208,559

Allowance for loan losses (4,255) Total loan portfolio, net 204,304

Other assets 27,436

Total assets $ 355,680

Liabilities

Deposits $ 241,429 Bank and other loans 10,258 Subordinated debentures 3,280 254,967 Securities and derivative transactions, net 10,818 Other liabilities 37,784

Total liabilities 303,569 Stockholders’ equity Stockholders’ equity 52,111

Total liabilities and stockholders’ equity $ 355,680

Statement of income

Interest on funds available $ 3,820

Interest and returns on investments in securities 6,910 Interest on total loan portfolio:

Commercial loans 5,920 Financial entities loans 67 Consumer loans 13,668 Mortgage loans 1,365 Government loans 3,044 FOBAPROA loans 1,962

26,026 Allowance for loan losses (2,846) Interest, commissions and rates on deposits, net:

Cashier (8,077)

Bank and other loans (1,502)

Interest on convertible subordinated debentures (193) (9,772) Interest, brokerage, commissions and rates on transactions with securities

and derivatives, net 3,161 Total financial margin and brokerage, net 27,299

Other net commissions and rates 1,125

Total operating income 28,424

Personnel and operating expenses, and other expenses and proceeds, net (18,913) Income of subsidiaries 217

Net income $ 9,728

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37 Comprehensive risk management The Financial Group regards risk management as a competitive element of a strategic nature, whose ultimate goal is to maximize stockholder value. This risk management is defined, both conceptually and organizationally, as the comprehensive treatment of the different risks (market, liquidity, credit, counterpart, operating, legal and technology risks) assumed by the Financial Group in the normal course of business. The way in which the Financial Group 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 Commission, the Board of Directors agreed to set up the Bank’s 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 in turn delegates responsibilities to the Comprehensive Management Risk Unit to implement the procedures for the measurement, management and control of risks based on established policies. It also grants it powers to authorize established limits to be exceeded, in which case the Board of Directors must be informed of such 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 Financial Group, 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. 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 balance sheet. The Financial Group 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 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.

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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 pesos and 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. The VaR in thousands of pesos applicable to December 31, 2006 (unaudited) was:

Thousands of MXP Financial Group Bank Brokerage House VaR %1 VaR %1 VaR %1

Trading Desks 655,878 1.29% 654,830 1.31% 1,405 0.19% Money and forwards 206,187 0.41% 205,273 0.41% 1,405 0.19% Risk Arbitrage and

Derivatives 40,249 0.08% 40,249 0.08% - - Spot Exchange 24,681 0.05% 24,681 0.05% - - Treasury 446,807 0.88% 446,807 0.89% - - Investment funds - - 894 - - -

Risk factor 655,878 1.29% 654,830 1.31% 1,405 0.19%

Interest rate 642,336 1.27% 642,556 1.29% 667 0.09% Exchange rate 33,745 0.07% 33,745 0.07% - - Variable income 19,643 0.04% 19,643 0.04% 1,283 0.17%

The VaR applicable to the quarterly average of 2006 (unaudited) was:

Thousands of MXP Financial Group Bank Brokerage House VaR %1 VaR %1 VaR %1

Trading desks 465,163 0.96% 462,440 0.96% 3,266 0.63% Money and forwards 223,828 0.47% 221,681 0.47% 3,200 0.61% Risk Arbitrage and

Derivatives 33,166 0.07% 33,137 0.07% 77 0.01% Spot Exchange 9,243 0.02% 9,238 0.02% - - Treasury 239,911 0.48% 239,898 0.49% - - Shares 73 - 73 - - - Investment funds 327 - 666 - 2 -

Risk factor 465,163 0.96% 462,440 0.96% 3,266 0.63%

Interest rate 452,794 0.93% 450,369 0.94% 3,016 0.59% Exchange rate 28,884 0.06% 28,884 0.06% - - Variable income 17,608 0.04% 17,608 0.04% 397 0.06%

(1) % VaR percentage of Net Capital

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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. Back testing is performed monthly to compare the daily losses and gains that would have been generated if the same positions had been maintained, considering only the change in value due to market movements, against the calculation of the value at risk, which thus allows the models used to be calibrated. While such reports are prepared monthly, they include the tests performed on a daily basis. Management of assets and liabilities- The Financial Group’s commercial banking activities generate significant 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, Wholesale Banking 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. As part of the financial Management performed by the Financial Group, the sensitivity of the financial margin (NIM) and net worth (MVE) of the different 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 (unaudited).

(Unaudited) (Unaudited) Sensitivity 1% NIM Sensitivity 1% MVE

Combined bank and Brokerage House Oct-06 Nov-06 Dec-06 Average Oct-06 Nov-06 Dec-06 Average

Balance Sheet MXP

GAP 35.57% 27.83% 22.27% 41.58% 96.73% 91.93% 90.87% 67.40% Balance Sheet MXP

Directional 73.97% 69.41% 23.43% 56.56% 44.40% 43.53% 43.15% 39.55% Balance Sheet USD

GAP 72.33% 101.59% 62.65% 61.58% 53.29% 52.10% 48.11% 60.79% Balance Sheet USD

Directional 4.84% 1.29% 87.92% 15.13% 23.43% 39.09% 94.60% 23.17%

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(Unaudited) (Unaudited) Sensitivity 1% NIM Sensitivity 1% MVE

Bank Oct-06 Nov-06 Dec-06 Average Oct-06 Nov-06 Dec-06 Average

Balance Sheet MXP GAP 29.36% 25.62% 21.62% 41.51% 97.13% 92.06% 90.90% 67.56%

Balance Sheet MXP Directional 62.60% 65.32% 22.15% 53.48% 42.24% 42.76% 42.91% 38.75%

Balance Sheet USD GAP 72.73% 101.59% 62.65% 61.58% 53.29% 52.10% 48.11% 60.79%

Balance Sheet USD Directional 4.84% 1.29% 87.92% 15.13% 23.43% 39.09% 94.60% 23.17%

Using simulation techniques, the foreseeable valuation of the financial margin and net worth is measured under different interest rate scenarios, and the sensitivity of both in the face of extreme movements in such items. The Assets and Liabilities Committee adopts investment and hedging strategies to keep such sensitivities within the objective range.

Límits - Limits are used to control risk for the Financial Group, and individually for the Bank, 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 Financial Group’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 Financial Group manages expirations of assets and liabilities, performing oversight of maximum profiles for time lags. This oversight is based on analyses of asset and liability expirations, both contractual and related to management. Please note that the Liquidity Risk is limited in terms of a Net Liquidity level accumulated over a one-month period and an established Liquidity Coefficient (unaudited). (Unaudited) (Unaudited) Liquidity Coefficient _ Accumulated Liquidity Gap _

Combined bank and Brokerage House Oct-06 Nov-06 Dec-06 Average Oct-06 Nov-06 Dec-06 Average

“Book” MXP (MM

MXP) 27.77% 26.94% 28.45% 30.58% 28.82% 29.82% 33.02% 41.11% “Book” USD (MM

USD) 20.69% 11.21% 18.16% 17.04% 7.80% 5.68% 7.62% 8.00%

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(Unaudited) (Unaudited) Liquidity Coefficient __ Accumulated Liquidity Gap

Bank Oct-06 Nov-06 Dec-06 Average Oct-06 Nov-06 Dic-06 Average “Book” MXP (MM

MXP) 27.96% 27.41% 28.70% 30.85% 29.20% 29.12% 35.53% 41.65% “Book” USD (MM

USD) 20.69% 11.21% 18.16% 17.04% 7.80% 5.68% 7.62% 8.00% Credit Risk - The management of the Financial Group’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 Financial Group 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).

For risks involving individual treatment, there is a solvency classification or rating system, which helps measure the risk for each customer and each transaction from its origin. 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.

The Recovery Units constitute a basic element in dealing with irregular risk, in order to minimize the final loss for the Financial Group. The Financial Group 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 Financial Group itself.

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Probability of Noncompliance and Expected Losses - Based on the prudent regulations for Comprehensive Risk management, as part of credit risk management, credit institutions must calculate the probability of noncompliance. The system enables the estimation of the probability of noncompliance for the different loan portfolios: a. The probability of noncompliance is determined by means of transition matrices, which consider

the rating results from prior periods and those obtained in the current period. b. Once the probability of noncompliance is determined, the severity of the loss is determined,

taking into account the recovery factor based on which the expected reserves position is calculated.

The transition matrices consider historical rating losses from one year for each type of portfolio, and the distribution of current rating positions. Once the projection matrices are obtained by type of portfolio, the composition of exposures is determined by degree of risk and, therefore, the projected probability of noncompliance.

The calculation of the expected losses considers the recovery factor implicit in the official rating methodology, which is represented by the balances and the amount exposed based on the size and quality of the guarantees.

Each month, back testing is performed to compare the level of estimated provisions against the actual provisions derived from the official rating exercises. In general, for all portfolios the model assertiveness exceeds 90% (unaudited).

Counterpart Risk - The overall credit risk includes a concept whose peculiar nature requires specialized handling: Counterpart risk.

Counterpart risk is that which the Financial Group 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, counterpart risk, is handled by a special unit whose organizational structure is independent of the business units. The control of counterpart risk is handled each day through the Global Kreditnet (KGL) system, which ascertains the line of credit available with any counterpart, in any product and for any term. The Credit Equivalent Risk (REC) is used to control counterpart lines. The REC is an estimate of the amount which the Financial Group might lose on current transactions with a given counterpart if the latter does not comply with its commitments, at any time up to the expiration date of the transactions. 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 Financial Group, and is measured as the market value of the transaction (MTM). 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 calculation of the REC also considers the existence of counterpart credit risk mitigating factors, such as collateral agreements, netting agreements, among others. Apart from the Counterpart Risk, there is the risk of settlement, which arises in any transaction at its expiration date, given the possibility that the counterpart will not comply with its obligations to pay the Financial Group, once the Financial Group has satisfied its obligations by issuing the respective payment instructions.

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Operating Risk - In terms of Operating Risk, the Financial Group has policies, procedures and methodologies to identify, control, mitigate, oversee and disclose Operating Risks, which are understood as the potential loss through failures or deficiencies in internal controls, due to errors in the processing and storage of transactions or in the transfer of information, and adverse administrative or judicial rulings, fraud or theft. 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 Financial Group. In compliance with prudent regulations established for Comprehensive Risk Management, the relevant statutory audits have been performed, and the periodic report on the estimated probability of favorable or adverse judgments in lawsuits involving the Financial Group, has been filed with the Comprehensive Risk Management Committee. 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 Financial Group. The Financial Group has implemented 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.

38 Capitalization ratio As of December 31, 2006, the Bank showed the following capitalization ratio, which is higher than the minimum required by the authorities:

Net Capital / Required Capital 1.71 Basic Capital / Assets subject to Credit and Market Risk 13.43 Net Capital / Assets subject to Credit Risk 26.41 Net Capital / Assets subject to Credit and Market Risk 13.66

The modifications to the capitalization requirements of full-service banks published in the Federal Official Gazette on December 28, 2005 went into effect as of January 2, 2006.

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39 Classifications As of December 31, 2006, the Bank maintains the following classifications:

Standard & Poor’s Moody’s Fitch Ratings National level -

Short-term mxA-1+ Mx-1 F1+(mex) Long-term mxAAA Aaa.mx AAA(mex)

Global level-

Foreign currency: Short-term A3 P-2 F2 Long-term BBB Baa1 A- Debt - A1 -

Mexican pesos:

Short-term A2 - F2 Long-term BBB+ - A-

Financial strength - C - Individual - - C Support - - 1 Perspective Stable Stable Stable

40 New accounting principles On January 1, 2006, Mexican NIF Series A went into effect. Such Series A represents the Conceptual Framework described in Note 3; however, some of its provisions originated disagreement with particular NIFs in effect. Consequently, in March 2006, the Mexican Board for Research and Development of Financial Reporting Standards (“CINIF”) issued Interpretation Number 3 to the Financial Reporting Standards (INIF No. 3), Initial Application of NIFs, thus establishing that provisions set forth in particular NIFs that have not been amended should be temporarily applied, while their tailoring to the Conceptual Framework is in progress. The CINIF continues to pursue its objective of moving towards a greater concurrence with international financial reporting standards. To this end, on December 22, 2006 it issued the following NIFs, which will become effective for fiscal years beginning on January 1, 2007: NIF B-13, Events Occurring after the Financial Statements Date NIF D-6, Capitalization of Comprehensive Financing Cost (Income)

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Some of the major changes established by these standards are as follows: NIF B-13, Events Occurring after the Date of the Financial Statements, requires that for (i) asset and liability restructurings and (ii) creditor waivers to their right to demand payment in case the entity defaults on contractual obligations, occurring in the period between the date of the financial statements and the date of their issuance, only disclosure needs to be included in a note to the financial statements while recognition of these items should take place in the financial statements of the period in which such events take place. Previously, these events were recognized in the financial statements in addition to their disclosure. NIF A-7, Presentation and Disclosure, in effect as of January 1, 2006, requires, among other things, that the date on which the issuance of the financial statements is authorized be disclosed as well as the name of authorizing management officer(s) or body (bodies). NIF B-13 establishes that if the entity owners or others are empowered to modify the financial statements, such fact should be disclosed. Subsequent approval of the financial statements by the stockholders or other body does not change the subsequent period, which ends when issuance of the financial statements is authorized. NIF D-6, Capitalization of Comprehensive Financing Cost (Income), establishes general capitalization standards that include specific accounting for financing in domestic and foreign currencies or a combination of both. Some of these standards are: a) mandatory capitalization of comprehensive financing cost (“RIF”) directly attributable to the acquisition of qualifying assets; b) in the case of financing in domestic currency used to acquire assets, yields obtained from temporary investments before the capital expenditure is made, are left out; c) exchange gains or losses from foreign currency financing should be capitalized considering the valuation of associated hedging instruments, if any; d) a methodology to calculate capitalizable RIF relating to funds from generic financing; e) regarding land, RIF may be capitalized if development is carried out; and f) conditions that must be met to capitalize RIF, and rules indicating when RIF should no longer be capitalized. The entity may decide on whether to apply provisions of NIF D-6 for periods ending before January 1, 2007, in connection with assets in the process of being acquired at the time this NIF goes into effect. At the date of issuance of these financial statements, the Bank has not fully assessed the effects of adopting these new standards on its financial information.

41 Reclassifications to the consolidated financial statements The consolidated financial statements as of December 31, 2005, have been reclassified to conform to the consolidated financial statements as of December 31, 2006. These reclassifications are performed for the following headings: Securities available for sale, permanent investments in shares, interest income, commissions and fees collected administrative expenses, other proceeds and other expenses.

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