SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
OR
For the fiscal year ended December 31, 2004
Commission file number: 1-10110
BANCO BILBAO VIZCAYA ARGENTARIA, S.A.
(Exact name of Registrant as specified in its charter)
BANK BILBAO VIZCAYA ARGENTARIA, S.A.
(Translation of Registrant’s name into English)
Kingdom of Spain
(Jurisdiction of incorporation)
Plaza de San Nicolás 4
48005 Bilbao
Spain
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of Each Class
Name of Each Exchange on which Registered
American Depositary Shares, each representing
the right to receive one ordinary share,
par value €0.49 per share
Non-Cumulative Guaranteed Preference Shares,
nominal value $25 each,
of BBVA Preferred Capital Ltd.
Guarantee of Non-Cumulative Guaranteed
Preference Shares, nominal value $25 each, of
BBVA Preferred Capital Ltd.
Series D, nominal value $0.01 each, of BBVA
Privanza International (Gibraltar) Ltd.
Preference Shares, Series D, nominal value $0.01
each, of BBVA Privanza International (Gibraltar) Ltd.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
The number of outstanding shares of each class of stock of the Registrant at December 31, 2004 was:
Ordinary shares, par value €0.49 per share—3,390,852,043
Non-Cumulative Guaranteed Preference Shares, nominal value $25 each, of BBVA Preferred Capital Ltd.—9,600,000
Non-Cumulative Guaranteed Preference Shares, Series D, nominal value $0.01 each, of BBVA Privanza International (Gibraltar) Ltd.—70
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 x
TABLE OF CONTENTS
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
i
THE OFFER AND LISTING
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
CONTROLS AND PROCEDURES
AUDIT COMMITTEE FINANCIAL EXPERT
CODE OF ETHICS
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PERSONS
FINANCIAL STATEMENTS
EXHIBITS
ii
GLOSSARY
The terms below are used as follows throughout this Annual Report:
FORWARD-LOOKING STATEMENTS
This Annual Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include words such as “believe”, “expect”, “estimate”, “project”, “anticipate”, “should”, “intend”, “probability”, “risk”, “VaR”, “target”, “goal”, “objective” and similar expressions or variations on such expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. The accompanying information in this Annual Report, including, without limitation, the information under
identifies important factors that could cause such differences. Readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. BBVA undertakes no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof, including, without limitation, changes in its business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.
CERTAIN TERMS AND CONVENTIONS
First person personal pronouns used in this report, such as “we”, “us”, or “our”, mean BBVA.
In this report, “$”, “U.S. dollars”, and “dollars” refer to United States Dollars, “€” and “euro” refer to Euro and “ARP” refers to Argentine pesos.
PRESENTATION OF FINANCIAL INFORMATION
Accounting Principles
Unless otherwise indicated, the financial information contained in this Annual Report has been derived from financial statements that have been prepared in accordance with generally accepted accounting principles for banks in Spain, which include the accounting requirements established by the Bank of Spain (“Spanish GAAP”). See Note 32.2 to the Consolidated Financial Statements for a discussion of some respects in which Spanish GAAP differs from generally accepted accounting principles in the United States (“U.S. GAAP”).
The Consolidated Financial Statements have been presented in the same format as that used in the consolidated financial statements included in BBVA’s annual and interim reports to shareholders. This format differs from that required by the United States
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Securities and Exchange Commission (the “SEC” or “Commission”) for the consolidated financial statements of bank holding companies. Consolidated balance sheets and summary statements of income that reflect the reclassifications required by the Commission are included in Note 32.2 to the Consolidated Financial Statements.
We manage our business along four segmental lines which are discussed in “Item 4. Information on the Company” and whose operating results are described in “Item 5. Operating and Financial Review and Prospects”. Certain numerical information in this Annual Report may not sum due to rounding.
Accelerated Amortization of Goodwill
The Consolidated Financial Statements are based on the Spanish statutorily approved financial statements included in BBVA’s reports to shareholders. The auditors’ report for the year ended December 31, 2000 was qualified with respect to the early amortization of goodwill arising mainly from the acquisition of our Latin American subsidiaries. In accordance with Spanish GAAP, this goodwill should have been capitalized and amortized over 10 years. U.S. securities regulations do not currently allow the use in filings with the Commission of financial statements on which the auditors’ report is qualified with respect to a material departure from generally accepted accounting principles. The financial statements included herein reflect adjustments of the Spanish statutorily approved financial statements solely for purposes of complying with U.S. securities regulations. The adjustments consist of the reversal of the early amortization of goodwill and the amortization of such goodwill over a period of five years, the estimated period of the associated assets’ useful life. The following table reflects these adjustments for the periods presented. This adjustment does not affect the years ended December 31, 2002, 2003 and 2004.
Net attributable profit as reported in BBVA’s Annual Report to shareholders
Net attributable profit reflecting reversal of early amortization of goodwill
Statistical and Financial Information
The following principles should be noted in reviewing the statistical and financial information contained herein:
Disclosures in this Annual Report with respect to the amount of “substandard loans” at any date reflect Bank of Spain classifications at such date. See “Item 4. Information on the Company—Selected Statistical Information—Assets—Loan Loss Reserve”, “—Substandard Loans” and “—Foreign Country Outstandings”. These classifications differ from the classifications applied by U.S. banks in reporting loans as non-accrual, past due, restructured and as potential problem loans. One of the most important differences is that under Bank of Spain classifications, in the case of loans which are classified as substandard because any payment of principal or interest is 90 days or more past due, initially only past due payments of principal or interest (to the extent accruing at the time that the relevant loan is classified as substandard) are treated as substandard. If any payment on a loan is past due for more than one year, or if, regardless of the time past due, the aggregate amount of past due principal and interest exceeds 25% of the principal amount of the loan, then the entire principal amount of the loan is required to be classified as substandard.
Translation into Euro Currency
The Consolidated Financial Statements are stated in euro. Financial data as of and for periods prior to December 31, 2001 included elsewhere in this Annual Report have been restated from pesetas into euro using the exchange rate in effect as of January 1, 1999 of Ptas.166.386 = €1.00. Data in pesetas converted to euro at such exchange rates show the same trends as would have been presented if the data had been presented in pesetas.
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
Spanish GAAP Data
The historical financial information set forth below has been selected from, and should be read together with, the Consolidated Financial Statements included herein. For information concerning the preparation and presentation of financial information contained herein, see “Presentation of Financial Information”. Also see Note 32.2 of the Consolidated Financial Statements for a presentation of our shareholders’ equity and net income reconciled to U.S. GAAP.
Consolidated statement of income data
Net interest income
Net fee income
Basic margin
Market operations
Ordinary revenue
General administrative expenses
Depreciation and amortization
Other operating revenues and expenses, net
Net operating income
Net income from companies accounted for by the equity method
Amortization of consolidation goodwill(1)
Net income on Group transactions
Net loan loss provisions
Net securities write-downs
Extraordinary items, net
Pre-tax profit(1)
Corporate income tax and other taxes
Income before minority interests(1)
Minority interests
Net attributable profit(1)
Per Share/ADS(2) data
Operating income(3)
Number of shares
Net attributable profit(3)
Dividends(3)(4)
3
Consolidated balance sheet data
Total assets(1)
Loans and leases, net
Deposits
Marketable debt securities and subordinated debt
Capital and reserves(1)(5)
Consolidated ratios
Profitability ratios:
Net interest margin(6)
Return on average total assets(7)
Return on average capital and reserves(8)
Credit quality data
Loan loss reserve
Loan loss reserve as a percentage of total loans and leases
Substandard loans(9)
Non-Performing loans as a percentage of total loans and leases
Loan loss reserve as a percentage of substandard loans
U.S. GAAP Information
Net income(2)
Basic earnings per share/ADS(3)(4)
Diluted earnings per share/ADS(3)(4)
Dividends per share/ADS (in dollars)(4)(5)
Consolidated balance sheet data as at December 31
Total assets(6)
Stockholders’ equity(6)
Basic stockholders’ equity per share/ADS(4)
Diluted stockholders’ equity per share/ADS(4)
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Exchange Rates
On January 1, 1999, the euro was introduced as a new currency in the following 11 European Union (“EU”) member states, forming the European Monetary and Economic Union at such date: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. As of January 2001, the euro was also introduced as the new currency in Greece. The currencies of the participating member states were nondecimal subdivisions of the euro until January 1, 2002 and for up to six months thereafter. The exchange rate at which the peseta has been irrevocably fixed against the euro is Ptas.166.386 = €1.00. Beginning January 1, 2002, the participating member states issued new euro-denominated bills and coins for use in cash transactions. By July 1, 2002, the participating member states withdrew from circulation the bills and coins denominated in their respective currencies, and they are no longer legal tender for any transactions. As used in this Annual Report, the term “noon buying rate” refers to the rate of exchange for euros, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes.
The following tables describe, for the periods and dates indicated, information concerning the noon buying rate for euro, expressed in dollars per €1.00.
Year ended December 31
2000
2001
2002
2003
2004
2005 (through June 29)
Month ended
December 31, 2004
January 31, 2005
February 28, 2005
March 31, 2005
April 30, 2005
May 31, 2005
June 30, 2005 (through June 29)
The noon buying rate for euro from the Federal Reserve Bank of New York, expressed in dollars per €1.00, on June 29, 2005, was $1.2101. Unless otherwise indicated, amounts that have been converted to euro in this Annual Report have been done so at the corresponding exchange rate published by the European Central Bank on December 31 of the relevant year.
At December 31, 2004, approximately 29.0% of our assets and approximately 32.2% of our liabilities were denominated in currencies other than euro (principally dollars).
For a discussion of our foreign currency exposure, please see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Market Risk Management by Business Area—Market risk in 2004—Structural Exchange Rate Risk”.
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Risks Relating to us
Since our loan portfolio is highly concentrated in Spain, adverse changes affecting the Spanish economy could have a material adverse effect on our financial condition.
We historically have developed our lending business in Spain, which continues to be our main place of business. As of December 31, 2004, business activity in Spain accounted for 76.46% of our loan portfolio. See “Item 4. Information on the Company—Selected Statistical Information—Loans by Geographic Area”. Any adverse changes affecting the Spanish economy are likely to have a significant adverse impact on our loan portfolio and, as a result, on our financial condition and results of operations.
A substantial percentage of our customer base is particularly sensitive to adverse developments in the economy, which renders our lending activities relatively riskier than if we lent primarily to higher-income customer segments.
Medium- and small-size companies and middle and lower middle income individuals typically have less financial strength than large companies and high-income individuals and accordingly can be expected to be more negatively affected by adverse developments in the economy. As a result, it is generally accepted that lending to these segments of our existing and targeted customer base represents a relatively higher degree of risk than lending to other groups.
A substantial portion of our loan portfolio consists of residential mortgages and consumer loans to middle and lower middle income customers and commercial loans to medium and small companies. Consequently, during periods of slowdown in economic activity we may experience higher levels of past due amounts which could result in higher levels of allowance for loan losses. We cannot assure you that we will not suffer substantial adverse effects on our base portfolio to these customer segments in the event of adverse developments in the economy.
Increased exposure to real estate in Spain makes us more vulnerable to developments in this market.
The sound economic growth, the strength of the labor market and a decrease in interest rates in Spain have caused an increase in the demand of mortgage loans in the last few years. This has had repercussions in housing prices, which have also risen significantly. As residential mortgages are one of our main assets, comprising 40%, 42% and 44% of our loan portfolio at December 31, 2002, 2003 and 2004, respectively, we are currently highly exposed to developments in real estate markets. A strong increase in interest rates or unemployment in Spain might have a significant negative impact in mortgage payment delinquency rates. An increase in such delinquency rates could have an adverse effect on our business, financial condition and results of operations.
Highly-indebted households and corporations could endanger our asset quality and future revenues.
Spanish households and firms have reached, in recent years, a high level of indebtedness, which represents increased risk for the Spanish banking system. The increase of loans referenced to variable interest rates make debt service on such loans more vulnerable to changes in interest rates than in the past. The increase in households’ and firms’ indebtedness also limits their ability to incur additional debt, decreasing the number of new products we may otherwise be able to sell them.
A sudden shortage of funds could cause an increase in our costs of funding and an adverse effect on our operating revenues.
Historically, one of our principal sources of funds has been savings and demand deposits. Time deposits represented 35.0%, 31.1% and 29.3% of our total funding at December 31, 2002, 2003 and 2004, respectively. Large-denomination time deposits may, under some circumstances, such as during periods of significant changes in market interest rates for these types of deposit products and resulting increased competition for such funds, be a less stable source of deposits than savings and demand deposits. In addition, since we rely heavily on short-term deposits for our funding, we cannot assure you that, in the event of a sudden or unexpected shortage of funds in the banking systems or money markets in which we operate, we will be able to maintain our current levels of funding without incurring higher funding costs or having to liquidate certain of our assets.
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We face increasing competition in our business lines.
The markets in which we operate are highly competitive. Financial sector reforms in the markets in which we operate have increased competition among both local and foreign financial institutions, and we believe that this trend will continue. For example, the adoption of the euro as the common currency throughout the EU is making it easier for European banks to compete against us in Spain. In addition, the trend towards consolidation in the banking industry has created larger and stronger banks with which we must now compete.
We also face competition from non-bank competitors, such as:
We cannot assure you that this competition will not adversely affect our business, financial condition and results of operations.
Our business is particularly vulnerable to volatility in interest rates.
Our results of operations are substantially dependent upon the level of our net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Interest rates are highly sensitive to many factors beyond our control, including deregulation of the financial sectors in the markets in which we operate, monetary policies pursued by national governments, domestic and international economic and political conditions and other factors.
Changes in market interest rates could affect the spread between interest rates charged on interest-earning assets and interest rates paid on interest-bearing liabilities and thereby negatively affect our results of operations. For example, an increase in interest rates could cause our interest expense on deposits to increase more significantly and quickly than our interest income from loans, resulting in a reduction in our net interest income.
In addition, income from treasury operations is particularly vulnerable to interest rate volatility. Since approximately 69% of our portfolio consists of variable interest rate loans maturing in more than one year, rising interest rates may also bring about an increase in the non-performing loan portfolio.
We must adopt new accounting standards in 2005 that will impact our financial reporting.
In 2004 we prepared our financial statements in accordance with Spanish GAAP, and prepared a reconciliation of certain items to U.S. GAAP as required by SEC regulations. Under current European Union (EU) law, listed EU companies had to apply from January 1, 2005 International Financial Reporting Standards (IFRS) adopted by the EU in preparing their consolidated financial statements.
Applying these standards to our consolidated financial statements will imply a change in the presentation of our financial information since the financial statements will include more components and reflect classification differences, and additional disclosure will be required. Additionally, there will be a change in the valuation of certain items. Regarding the former, at this moment it is not possible to determine the exact impact that this new regulation will entail compared to Spanish GAAP, since new pronouncements from the International Accounting Standards Board (IASB), or pronouncements that are not endorsed by the European Union (EU) prior to the preparation of our December 31, 2005 consolidated financial statements, may have an impact on our financial statements. Regarding the latter, we have performed a preliminary analysis of how the adoption of IFRS will impact our financial condition and results of operations. We cannot assure you, however, that we will not experience any decreases in our shareholders’ equity or that our net income, each as calculated under IFRS, will not decrease or increase, respectively, when we prepare our 2005 consolidated financial statements under IFRS. We also cannot assure you that any such decrease in shareholders’ equity or net income would not have a material adverse effect on our results of operations and financial condition. See “Operating and Financial Review and Prospects-International Financial Reporting Standards (IFRS)”.
Our financial statements and periodic disclosure under securities laws may not give you the same information as financial statements prepared under U.S. accounting rules and periodic disclosures provided by domestic U.S. issuers.
Publicly available information about public companies in Spain is generally less detailed and not as frequently updated as the information that is regularly published by or about listed companies in the United States. In addition, although we are subject to the periodic reporting requirements of the United States Securities Exchange Act of 1934 (the “Exchange Act”), the periodic disclosure required of foreign issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. Finally, we maintain our financial accounts and records and prepare our financial statements in conformity with Spanish GAAP, which differs in certain respects from U.S. GAAP, the financial reporting standard to which many investors in the United States may be better accustomed.
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Risks Relating to Latin America
The devaluation of the Argentine peso, high inflation and other adverse macroeconomic conditions in Argentina and related emergency measures adopted by the Argentine Government in 2001 and 2002 have had, and may continue to have, a material adverse effect on our business, financial condition and results of operations.
The Argentine economy experienced a severe crisis in 2001 and 2002, marked by the continued movement of capital out of Argentina, the end of convertibility of the peso, devaluation, and the return of inflation. The crisis had a strong impact on the financial system and jeopardized the solvency and liquidity of banks. In 2003 and 2004, the Argentine economy stabilized and experienced significant growth, but uncertainty regarding the scope, sustainability and pace of the recovery remained. The Argentine economic and social situation has quickly deteriorated in the past and may quickly deteriorate in the future and we cannot assure you that the Argentine economy will continue to experience sustained growth.
The emergency measures adopted by the Argentine government in response to the economic crisis at the end of 2001 and during 2002 that affected our results of operations included: freezing public debt payments, ending convertibility between the Argentinean peso and the dollar, imposing cash withdrawal limits on sight and savings accounts, re-scheduling of term deposit maturities and converting dollar assets and liabilities to pesos at different exchange rates.
As a result of the emergency measures described above, we have written off our entire investment in Argentina to date. However, despite our provisions and write-downs, a deterioration in the Argentine economy or further emergency measures adopted by the government in Argentina could have a material adverse effect on our business, financial condition and results of operations.
We cannot assure you that the laws and regulations currently governing the Argentinean economy will not change in the future, or that any changes which may occur will not adversely affect our business, financial condition or results of our operations in the country, or the business which we transact with counterparties located in the country.
Our Latin American subsidiaries’ growth, asset quality and profitability may be affected by volatile macroeconomic conditions, including government default on public debt, in the Latin American countries where they operate.
The Latin American countries where we operate have experienced significant economic volatility in recent decades, characterized by slow growth, declining investment and significant inflation. This volatility has resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend. Negative and fluctuating economic conditions, such as a changing interest rate environment, also affect our profitability by causing lending margins to decrease and leading to decreased demand for higher-margin products and services.
Negative and fluctuating economic conditions in some Latin American countries could result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is generally high in several Latin American countries in which we operate.
While we seek to mitigate these risks through the conservative risk policies described in “Item 11. Quantitative and Qualitative Disclosures About Market Risk”, no assurance can be given that our Latin American subsidiaries’ growth, asset quality and profitability will not be affected by volatile macroeconomic conditions in the Latin American countries in which we operate.
Latin American economies can be directly and negatively affected by adverse developments in other countries.
Financial and securities markets in Latin American countries in which we operate, are to varying degrees, influenced by economic and market conditions in other countries in Latin America and beyond. Negative developments in the economy or securities markets in one country, particularly in an emerging market, may have a negative impact on other emerging market economies. These developments may adversely affect the business, financial condition and operating results of our subsidiaries in Latin America.
We are exposed to foreign exchange and, in some instances, political risks as well as other risks in the Latin American countries in which we operate, which could cause an adverse impact on our business, financial condition and results of operations.
We operate commercial banks in 10 Latin American countries and our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social and political conditions. We are confronted with different legal and regulatory requirements in many of the jurisdictions in which we operate. These include, but are not limited to, different tax regimes and laws relating to the repatriation of funds or nationalization of assets. Our international operations may also expose us to risks and challenges which our local competitors may not be required to face, such as exchange rate risk, difficulty in managing a local entity from abroad, and political risk which may be particular to foreign investors. Our expansion in these markets requires us to respond to
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rapid changes in market conditions in these countries. We cannot assure you that we will continue to succeed in developing and implementing policies and strategies that are effective in each country in which we operate or that any of the foregoing factors will not have a material adverse effect on our business, financial condition and results of operations.
Regulatory changes in Latin America that are beyond our control may have a material effect on our business, financial condition and results of operations.
A number of banking regulations designed to maintain the safety and soundness of banks and limit their exposure to risk are applicable in certain Latin American countries in which we operate. Local regulations differ in a number of material respects from equivalent regulations in Spain and the United States.
Changes in regulations that are beyond our control may have a material effect on our business and operations. In addition, since some of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. No assurance can be given that laws or regulations will be enforced or interpreted in a manner that will not have a material adverse effect on our business, financial condition and results of operations.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
BBVA’s predecessor bank, BBV, was incorporated as a limited liability company (a sociedad anónima or “S.A.”) under the Spanish Corporations Law on October 1, 1988. BBVA was formed as the result of a merger by absorption of Argentaria into BBV that was approved by the shareholders of each institution on December 18, 1999 and registered on January 28, 2000. It conducts its business under the commercial name “BBVA”. BBVA is registered with the Commercial Registry of Vizcaya (Spain). It has its registered office at Plaza de San Nicolás 4, Bilbao, Spain, 48005, telephone number 34-94-420-3001. BBVA’s agent in the U.S. for U.S. federal securities law purposes is Raúl Santoro de Mattos Almeida (BBVA New York, 1345 Avenue of the Americas, 45th floor, NY, New York, 10105). BBVA is incorporated for an unlimited term.
On March 29, 2005, our Board of Directors approved the launch of an exchange offer for the approximately 85.3% of the shares of Banco Nacionale del Lavoro, S.p.A. (“BNL”) which we did not already own (the “BNL Exchange Offer”). Under the terms of the BNL Exchange Offer, BBVA is offering one of its ordinary shares for every five ordinary shares of BNL. On April 8, 2005, BNL’s board of directors announced that it considered the terms of the BNL Exchange Offer to be fair and on April 27, 2005, the Commission of European Union approved the BNL Exchange Offer as compatible with the European common market. On April 14, 2005, the Commissione Nazionale per la Borsa (the Italian securities regulator) approved the BNL Exchange Offer and on May 13, 2005, the Bank of Italy authorized BBVA to acquire more than 50% of BNL’s shares. On June 14, 2005, an Extraordinary Meeting of Shareholders of BBVA approved a capital increase to finance the BNL Exchange Offer. Under the terms of the proposed capital increase, BBVA will issue up to a maximum of 531,132,133 new ordinary shares. BBVA’s shareholders also resolved to delegate to our Board of Directors the authority to determine the appropriate moment to undertake the capital increase. On June 21, 2005, the Bank of Spain announced that it would not oppose the capital increase.
We launched the exchange offer on June 20, 2005 and the final day on which acceptances will be accepted will be July 22, 2005. The BNL Exchange Offer is not being made and will not be made, directly or indirectly, in or into the United States, Canada, Japan, Australia or any other jurisdiction in which any such exchange offer would require the authorization of the relevant regulatory authorities or would violate applicable laws or regulations. In particular, no offer to purchase BNL shares or to sell BBVA shares is being made, directly or indirectly, in or into, or by use of the mails of, or by any means or instrumentality (including, without limitation by mail, telephonically or electronically by way of internet or otherwise) of interstate or foreign commerce, or any facility of any securities exchange, of the United States and the BNL Exchange Offer will not be capable of acceptance by any such use, means, instrumentality or facility. Accordingly, under the terms of the BNL Exchange Offer, we will not accept tenders from the United States or from Canada, Japan, Australia or any other jurisdiction in which the BNL Exchange Offer would require the authorization of the relevant regulatory authorities or would violate applicable laws or regulations.
Capital Expenditures
Our principal capital expenditures from 2002 to the date of this Annual Report were the following:
2005
On April 28, 2005, we acquired all of the common shares of Laredo National Bancshares Inc., a privately-owned financial holding company and bank holding company headquartered in Laredo, Texas for $850 million. The acquisition closed after receiving regulatory approvals from the Board of Governors of the Federal Reserve System and the Bank of Spain.
On January 7, 2005, our Mexican affiliate Grupo Financiero BBVA Bancomer, S.A. de C.V. (“Bancomer”) acquired all of the common shares of Hipotecaria Nacional de Mexico, a privately held Mexican mortgage bank, for $356 million. The acquisition closed after receiving regulatory approvals from the relevant Mexican authorities.
On January 30, 2004, our Board of Directors adopted a resolution to launch a tender offer for the approximately 40.6% of the shares of Bancomer, our Mexican affiliate, which were not already owned by BBVA. The tender offer was launched on February 19, 2004 and expired on March 19, 2004. As a result of the successful completion of the tender offer and subsequent purchases during 2004 of Bancomer’s capital stock, at December 31, 2004, we owned 99.70% of Bancomer’s outstanding shares.
On March 18, 2004, the Board of Directors of BBVA Banco Francés, S.A. (“Banco Francés”), our Argentine affiliate, resolved to implement a plan intended to improve Banco Francés’s adjusted stockholders’ equity and enable Banco Francés to comply with new minimum capital requirements established by the Argentine Central Bank. Under this plan, we:
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The transactions involving Banco Francés described above did not affect BBVA’s consolidated operating results because (i) in the case of the loan capitalization, BBVA had previously fully provisioned the loan, and (ii) in the case of the purchase of Banco Francés (Cayman) Limited, this entity was already fully consolidated by BBVA.
On October 8, 2004, we acquired all the shares of Valley Bank, a bank licensed in the state of California, for U.S.$16.7 million, which was BBVA’s first commercial banking acquisition in the United States.
During 2003, BBVA acquired 0.176% of the capital stock of Gas Natural S.D.G, S.A. (“Gas Natural”) for €12.7 million, raising its interest in Gas Natural to 3.241%.
During 2003, BBVA purchased 4.76% of the capital stock of Bancomer for a total of €304 million, raising its interest to 59.43% as of December 31, 2003.
On May 14, 2002, Banco Francés sold its interest in BBVA Uruguay (60.88%) to BBVA for $55 million, after obtaining authorization from the Central Bank of Uruguay. As a result of this transaction, BBVA’s ownership interest in BBVA Uruguay increased from 80.66% to 100%.
On May 15, 2002, Terra Networks, S.A. (“Terra Networks”) and BBVA entered into a preliminary agreement for the integration of Uno-e Bank, S.A. and the individual consumer financing business of Finanzia Banco de Crédito, S.A. (“Finanzia”), BBVA’s wholly-owned subsidiary, whereby Terra Networks’ holding in Uno-e Bank would decrease to 33%. This integration transaction and the percentage of ownership held by Terra Networks were subject to the formalization of final contracts, which were executed on January 10, 2003, and approved at extraordinary shareholders’ meetings of Finanzia and Uno-e Bank held on April 23, 2003. In connection with the integration transaction, Terra Networks was granted a put option over its shares in the resulting combined entity giving it the right to require BBVA to purchase such shares. For more information relating to this transaction, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Agreement with Terra Networks” and “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Uno-e Bank Agreement”.
In two transactions in June and November 2002, BBVA purchased from the Mexican government its 3% and 2.5% interests in Bancomer for approximately €240 million and €175 million, respectively. As a result of these transactions, BBVA’s ownership interest in Bancomer increased to 54.67% as of December 31, 2002.
Capital Divestitures
Our principal capital divestitures from 2002 to the date of this Annual Report were the following:
We engaged in a series of purchases and sales of shares of Iberdrola, S.A. during the three months ended March 31, 2005, resulting in a 0.3% net reduction of our holding and giving rise to a capital gain of €74.76 million.
In January 2004, BBVA sold 2.2% of the capital stock of Gas Natural, S.D.G. S.A. At the time the transaction closed, BBVA had not completed preparation of its 2003 Consolidated Financial Statements and therefore, in accordance with Spanish GAAP, reflected the amortization of €70 million of consolidation goodwill which resulted from the transaction in such financial statements rather than in its 2004 Consolidated Financial Statements.
In March 2004, the Group sold its 24.4% holding in Banco Atlántico, S.A. at the price established by Banco Sabadell, S.A. in its tender offer for all the shares of Banco Atlántico, S.A. This sale gave rise to a gain of €217.7 million for the BBVA Group.
In March 2004, the Group sold its 50% holding in Hilo Direct Seguros y Reaseguros, S.A, which represented all of the Group’s interests. This sale gave rise to a gain of €26 million for the BBVA Group.
In June 2004, the Group sold its 5.0% holding in Acerinox, S.A., which represented all of the Group’s interests. This sale gave rise to a gain of €34.6 million for the BBVA Group.
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On September 6, 2004, the Group sold its 17.2% holding in Vidrala, S.A., giving rise to a gain of €19.3 million.
In December 2004, the Group sold its 3% holding in Gamesa, S.A., which represented all of the Group’s interests. This sale gave rise to a gain of €53.1 million for the BBVA Group.
In the second quarter of 2004, the Group exercised a sale option it had on its 33.3% holding in Grubarges Inversión Hotelera, S.L., and recognized a gain of €26.3 million on such sale.
During the first six months of 2004, the Group sold its 0.6% holding in Repsol YPF, S.A. These sales gave rise to a loss of €6.5 million for the BBVA Group.
During 2004, The Group purchased and sold several shares of Telefónica de España, S.A. without any material variation in its aggregate holding in such company as of December 31, 2003. These sales gave rise to a gain of €141.7 million.
On January 13, 2003, BBVA announced its intention to sell its Brazilian affiliate, Banco Bilbao Vizcaya Argentaria Brasil, S.A. (“BBV Brasil”) to Banco Bradesco, S.A. (“Bradesco”). On June 9, 2003, upon completion of due diligence, receipt of authorizations from regulatory authorities and approval by the corresponding corporate bodies, BBVA transferred 100% of BBV Brasil to Bradesco, in consideration for which Bradesco paid 35,481,460,311 of its newly-issued ordinary shares and 34,948,501,563 of its newly-issued preferred shares, totaling 4.44% of Bradesco’s share capital, as well as 1,864 million Brazilian Reais in cash, for a total consideration of approximately 2,626 million Brazilian Reais (approximately $900 million). We were required, under Spanish GAAP, to take an extraordinary charge in 2002 relating to exchange rate differences relating to our investment in BBV Brasil accumulated up to December 31, 2002. Under the transaction agreements with Bradesco, in addition to the cash consideration and equity participation described above, we have been granted the right to nominate one member of Bradesco’s board of directors so long as we maintain, subject to exceptions relating to capital increases where shareholders are not offered preemptive rights, at least a 4.0% interest in Bradesco’s share capital. We have agreed for a period of two years from the closing date or so long as we have a right to nominate one member of Bradesco’s board of directors, whichever is longer, that we will not control and/or manage a financial institution in Brazil. See Note 32.2.D.13 to the Consolidated Financial Statements.
In March 2003, BBVA sold its 25% interest in Metrovacesa Residencial, S.A., resulting in a capital gain of €2.1 million.
On June 5, 2003, BBVA agreed to sell its holding in Crédit Lyonnais, S.A., to Crédit Agricole, S.A. in exchange for €482 million in cash, representing 67% of consideration, and 16.3 million shares of Crédit Agricole, S.A., representing the remaining 33% of consideration. BBVA immediately sold the Crédit Agricole shares to institutional investors at a price of €16.64 per share, for a total consideration of €271 million. As a result of this transaction, BBVA liquidated its participation in Crédit Lyonnais and recorded a capital gain of €342 million.
In July 2003, BBVA sold 3% of the capital stock of Gamesa, giving rise to a capital gain of €29.9 million.
In the last quarter of 2003, BBVA sold 2.465% of the capital stock of Repsol-YPF, giving rise to a loss of €73.3 million.
In 2003, a series of purchases and sales of shares of Telefónica de España, S.A., resulting in a 0.57% net reduction of our holding, gave rise to a capital gain of €220 million.
In 2003, a series of purchases and sales of shares of Iberdrola, S.A., resulting in a 1.02% net reduction of our holding, gave rise to a capital gain of €45.3 million.
In December 2003, BBVA sold its entire 9.9% interest in the Moroccan bank Wafabank, S.A. to Omnium Nord Africain, S.A. The total sale price was 529,505,625 dirhams (approximately €48 million) and gave rise to a capital gain of €3.5 million.
In December 2003, Banco Sabadell, S.A. launched a tender offer for the shares of Banco Atlántico, S.A. at a price of €71.79 per share. The transaction was completed in March, 2004 and BBVA sold its entire 24.37% interest in Banco Atlántico, which gave rise to a capital gain of approximately €218 million.
In the first quarter of 2002, BBVA sold 3.82% of its holding in Metrovacesa, S.A., giving rise to a capital gain of €14 million. In June 2002, BAMI, S.A. Inmobiliaria de Construcciones y Terrenos agreed to purchase BBVA’s 23.9% interest in the capital stock of Metrovacesa, S.A. for €545.4 million (€36.55 per share). This transaction closed on July 17, 2002. As a result of this sale, as of December 31, 2002, BBVA had a 0.58% interest in Metrovacesa, S.A. The transaction gave rise to a capital gain of approximately €361 million.
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B. Business Overview
BBVA is a highly diversified international financial group, with strengths in the traditional banking businesses of retail banking, asset management, private banking and wholesale banking. We also have a portfolio of industrial holdings in some of Spain’s leading companies.
Business Areas
The following is a description of our business areas:
The foregoing description of our business areas is consistent with our current internal organization. The financial information for our business areas for the years 2004, 2003 and 2002 presented below has been prepared on a uniform basis. Unless otherwise indicated, the financial information provided below for each business area does not reflect the elimination of transactions between companies within one business area or between different business areas, since we consider these transactions to be an integral part of each business area’s activities. For the presentation and discussion of our consolidated operating results in “Item 5—Operating and Financial Review and Prospects” and elsewhere in this Annual Report, however, such intra- and inter-business area transactions are eliminated and the eliminations are generally reflected in the operating results of the Corporate Activities and Other business area.
In our Annual Report for the years ended December 31, 2003 and 2002, due to the economic, political and social crises that affected our Argentinean operations in such period, we provided additional disclosure on our Argentinean operations and discussed such operations as if they comprised a separate business area. In 2004, economic, political and social conditions in Argentina have stabilized and the Argentine economy has experienced significant growth. As a result of such stabilization and growth, our management no longer tracks our Argentine operations as a separate business area and, accordingly, in this Annual Report we do not discuss our Argentinean operations separately, but rather as part of the business area Banking in America, where these operations were included in our Annual Report for 2001 and for prior years.
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The following table provides net attributable profit information for our business areas for the years ended December 31, 2004, 2003 and 2002.
Business Area
Retail Banking in Spain and Portugal
Wholesale and Investment Banking
Banking in America
Subtotal
Corporate Activities and Other
Net attributable profit
The Retail Banking in Spain and Portugal area’s main lines of activity focused on providing banking services to private individuals, retailers and small and medium-sized entities, as well as managing mutual funds, pensions and insurance brokerage. This area developed its business activities through 3,397 branch offices.
The business units included in the Retail Banking in Spain and Portugal business area are:
Total net lending in this business area as of December 31, 2004, was approximately €109,591 million, an increase of 20.0% from €91,295 million as of December 31, 2003, principally due to growth in mortgage lending and personal loans.
The non-performing loan (“NPL”) ratio fell to 0.61% as of December 31, 2004, from 0.85% as of December 31, 2003. The loan coverage ratio rose to 379.4% as of December 31, 2004 from 269.5% as of December 31, 2003.
Total customer funds (mainly deposits, mutual and pension funds), were €115,399 million as of December 31, 2004, an increase of 48.7% compared to 2003 as a result of an increase in deposits collected during the year. Mutual funds under management were €41,988 million as of December 31,2004, an increase of 13.7% compared to 2003. Pension funds under management were €13,731 million as of December 31,2004, an increase of 10.5% compared to 2003.
Commercial Banking and Small and Medium Entities (SME) Banking
This business unit’s main lines of activity were focused on the development of the Financial Services Plan (our business model for this business area adopted in 2002) including Personal Financial Services aimed at residential customers and Commercial Financial Services for SMEs and businesses.
In 2004, lending by Commercial Banking achieved a 20.4% increase to €102,601 million from €85,245 million in 2003, principally due to strong growth in mortgage products such as Hipoteca Fácil (Easy Mortgage). Mortgages increased to €13,646 million during 2004, an increase of 39.8% over 2003. The Commercial Banking unit reinforced its range of innovative products for car owners through several credit card products offered through joint ventures. These products included the Master Solred and Mutua Automovilística credit cards.
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Mutual and pension funds managed by the Commercial Banking business unit increased during 2004 by 7.1% and 12.9%, respectively.
The SME Banking unit’s total loan portfolio was over €36 billion as of December 31, 2004, a 20% increase compared to 2003. Billing for leasing and billing for renting, factoring and confirming registered an increase of 25% and 30% compared to 2003, respectively.
Customer funds under management by the SME Banking increased by €791 million in 2004, primarily due to the success of five mutual funds distributed by the SME Banking network and designed by the Asset Management unit to enable SME’s to optimize their cash-flow management.
The SME Banking unit also distributed insurance products such as Segurpyme, Seguleasing, Keyman and Keyman Plus to provide coverage for companies’ assets, business and people. As of December, 31, 2004, the SME Banking Unit insured approximately 7,000 of BBVA’s clients with a total of 41,270 policies and generated €14.5 million in premium revenue.
Asset Management and Private Banking
This unit is the result of the reorganization of our private banking activities carried out in 2003. The goal of this reorganization was to align product creation with our distribution networks and simultaneously give an overall view of the high-income customer segment. Together with subunits that focus primarily on designing and managing products, this unit has responsibility for managing this customer segment.
Total assets managed by this unit as of December 31, 2004, was €66 billion, an increase of 14.4% over 2003.
BBVA’s private banking business, through its BBVA Patrimonios and Personal Banking subunits, managed total assets of €13.5 billion in 2004, an increase of 12.6% over 2003. BBVA Patrimonios’s business strategy is aimed at increasing the returns it offers to high-net worth customers by employing a team of private banking specialists directly accessible to such customers. The Personal Banking subunit has improved the services it offers to its customer base by marketing funds from the principal mutual funds companies available internationally.
BBVA Portugal
BBVA Portugal experienced significant growth in 2004. Customer loans increased by 21.3%, boosted by a 43% increase in mortgage lending due primarily to the success of the Hipoteca Cuota Final mortgage product.
The BBVA Portugal unit’s funds under management increased by 16.6% in 2004 principally due to strong 20% growth in mutual fund assets, which increased by 20% over 2003. We also launched new structured deposit products 2004, as well as mixed deposits that combine fixed deposits with mutual funds.
Special Financial Services
The Special Financial Services unit, which operates through Finanzia and and our online bank Uno-e Bank S.A., operates in the following lines of business: the financing of cars, consumer items and equipment, e-banking, bill payment and the car and equipment renting. The workforce is made up of 885 employees; with a distribution network of 37 branches and a customer base of 2.4 million.
As of December 31, 2004, total net lending and customer funds managed by this unit was €3,123 million and €941 million, respectively, and the NPL ratio improved by 81 basis points to 1.47%, with a coverage ratio of 162.7%.
European Insurance
The European Insurance business unit comprises several subunits that manage our insurance business in Spain and Portugal. Such subunits engage in direct sales of coverage (through BBVA Seguros) for life, savings, multi-peril, home and construction insurances, as well as reinsurance and insurance brokering through BBVA Correduría and BBVA Broker.
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The Wholesale and Investment Banking business area focuses on large corporate, governmental, non-governmental organizations and institutional investor clients.
The business units included in this business area are:
As of December 31, 2004, lending in this area was €41,672 million, an increase of 5.9% over 2003. Nonperforming loans decreased 57.6% to an NPL ratio of 0.19% as of December 31, 2004, compared to 0.50% as of December 31, 2003, principally due to an improvement in risk quality. Funds managed (deposits and mutual funds) recorded an increase of 14.1% compared to 2003.
Global Corporate Banking
The Global Corporate Banking business unit provides services to large Spanish and multinational corporations. Its organizational structure is aimed at improving the capacity to satisfy customer needs with an integral offer of products and services that feature special characteristics for each local market. The unit is represented in 15 countries by the following subunits:
In 2004, The Global Corporate Banking unit managed over €21.6 billion in loans and approximately €10 billion of customer funds. The Capital Markets subunit is responsible for our syndicated loan and structured financing transaction activities, including significant transactions in Spain during 2004 carried out by Telefónica, Iberdrola, Enagas, Red Eléctrica de España and Ferrovial, while in Latin America BBVA was involved as mandated lead arranger in syndicated loans to Pemex, Telmex and Codelco as well as the financing of the “Sistema Carretero del Oriente” of the Mexican federal government.
Institutional Banking
The Institutional Banking business unit focuses on governmental and institutional clients, including the Spanish government and the governments of Spain’s autonomous communities as well as private organizations, associations, foundations and insurance companies. The Institutional Banking unit operates in these markets under the BBVA brand name and through Banco de Crédito Local (BCL), an entity specializing in long-term financing.
In 2004, the Institutional Banking unit submitted 44 bids for public contracts launched by the Central Government. Among the new contracts awarded to the Institutional Banking unit were the management of the treasury of the State Lotteries and Bets Organization and the Official Gazette of Spain and designation by the European Commission as its treasurer bank in Spain.
Global Markets and Distribution
The Global Markets and Distribution business unit focuses on a wide range of securities market-oriented activities. This business unit engages in both treasury operations on behalf of BBVA and transactions for third parties. In the equity securities area the Global Markets and Distribution business unit acted as book runner in BBVA’s capital increase and Banco Sabadell’s public bid to finance its purchase of Banco Atlántico. Global Markets and Distribution was also the global coordinator in the initial public offerings of Cintra and Fadesa.
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The Global Markets and Distribution unit’s derivatives trading activities decreased in 2004 due to downward trends in these markets, while the fixed-income securities business increased during 2004 principally due to cross-selling of products and services with other BBVA business areas and units. For example, the Global Markets and Distribution unit has made fixed-income and equity security products, as well as mutual funds, available for marketing and sale through BBVA’s retail banking branch network. The Global Markets and Distribution unit also established its independent research subunit BBVA Research in September 2004 to ensure an independent and integral view of markets and geographical areas.
The Global Markets and Distribution unit is particularly active in a number of securities and trading markets, including the AIAF fixed-income market, the Spanish stock market, the Spanish foreign exchange market for euro/U.S. dollar transactions and the Spanish government debt securities market.
Business and Real Estate Projects
The Business and Real Estate Projects unit manages a portfolio of enterprises and real estate businesses, with an approach based on four key elements: profitability, rotation, liquidity and optimization of the use of economic capital. The unit manages a portfolio of 116 investments with a book value as of December 31, 2004 of €841 million and unrealized gains amounting to €859 million compared to €749 million as of December 31, 2003. Its investment portfolio is diversified among the real estate, capital goods and services sectors.
Divestitures from this investment portfolio in 2004 amounted to approximately over €550 million generating capital gains of €250 million. The most significant dispositions were the sale of its 3%, 5%, 33.3% and 17.2% interests in the capital stock of Gamesa, Acerinox, Grubarges and Vidrala, respectively.
In 2004, the Business and Real Estate Projects unit launched the brand Anida, which currently has a property development portfolio of 3 million m2 of buildable land and almost 4,000 buildings under management.
Global Transaction Services
The Global Transaction Services unit supports the specialized management of corporate and institutional transaction business both in the wholesale area and in the Group’s other areas, offering a wide range of products and services, including domestic and international collections and payments, loans, trade bill discounting, factoring, confirming, credit cards, foreign trade, electronic banking, correspondent banking and cash pooling systems services.
Unless otherwise specified, information included below relating to macroeconomic data in the Latin American countries in which we operate, such as GDP or inflation, has been drawn from our internal statistical studies based on information published by local governmental or regulatory authorities.
The economic conditions in the Latin American countries in which we operate improved in 2004, with average growth in gross domestic product (GDP) of 6%. Inflation was relatively moderate in 2004, whereas trends in interest rates have been mixed. In Mexico, increased interest rates had a positive effect on the Banking in America area’s net interest income, whereas the decrease in interest rates in Venezuela and Chile had a negative effect on the area’s net interest income. The majority of Latin American currencies experienced lower declines in value against the dollar in 2004 compared to 2003, with some currencies appreciating in value against the dollar. However, the depreciation of the dollar’s value against the euro has negatively impacted the Banking in America business area’s contribution to our consolidated profits.
The Banking in America business area includes the banks, pension fund managers and insurance companies managed by BBVA in Latin American countries, as well as our international private banking business. Our Banking in America activities are carried out through 3,300 branches in the region with over 51,000 employees.
The Banking in America business area strategy in 2004 has been to restore growth in lending, where after years of restrictions, conditions are now more favorable. This strategy was reflected in specific acquisitions, which sought to complement the strong growth potential of the area’s existing businesses with growth by acquiring other businesses with similarly strong potential for growth. Examples of such acquisitions include the purchase of minority holdings in Bancomer and the purchase of Hipotecaria Nacional to improve the area’s position within the growing mortgage segment in Mexico, as well as the acquisitions of Laredo National Bancshares in Texas and Valley Bank in California (each of which were integrated into the area’s new U.S. subunit), which were selected as targets because of their potential for increased growth within our Banking in America area due to this area’s experience in specific customer segments traditionally serviced by these acquired businesses.
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As of December 31, 2004, the Banking in America business area had total assets of €74,992 million, which represented 24.1% of BBVA’s total assets. In 2004, the net attributable profit of this business area was €1.2 billion, which represented 44.2% of the Group’s net attributable profit.
Our Mexican operations form the core of our activities in Latin America and they contributed approximately two-thirds of the Banking in America business area’s total assets, operating profit and pre-tax profit as of December 31, 2004.
The following is a description of our operations and the economic and political factors that most significantly affect such operations, on a country-by-country basis, in the Banking in America business area. The operating results described below refer to each individual unit’s contribution to the Banking in America business area’s operating results, unless otherwise stated.
Mexico
BBVA reaffirmed it’s strategic commitment to Mexico by successfully launching a tender offer for 40.6 % of the shares of Bancomer it did not already own in February 2004. After the conclusion of the tender offer process and subsequent purchases, our interest in Bancomer increased to a 99.7% interest in its share capital as of December 31, 2004.
The continued recovery of the U.S. economy in 2004, particularly in terms of industrial output, benefited our business in Mexico, which had the highest rate of growth in GDP in the last three years (approximately 4%). This economic growth led to a moderate rise in inflation (approximately 5%). Exchange rates, however, were volatile. As of December 31, 2004, exchange rates for the Mexican peso had depreciated 4.3% and 13% against the dollar and the euro, respectively, from exchange rates as of December 31, 2003. This volatility in exchange rates, as well as the increase in interest rates in the U.S., led the Bank of Mexico to implement a restrictive monetary policy, which led to a rise in interest rates. The TIIE (Mexico’s Interbank offered rate), which had fallen below the 5% mark at the beginning of 2004, was at 8.9% at December 31, 2004. The average TIIE rate for 2004 was 7.2%, compared 6.8% in 2003). Long-term interest rates experienced a sharp increase in 2004, which had a negative effect on Bancomer’s results of operations.
Within this economic background, Bancomer has experienced increased growth in its operations, in spite of increasing competition in the Mexican banking sector. Total net lending at December 31, 2004, was €13.5 billion, an increase of 15.8% compared to 2003. Bancomer retained its position as one of the Mexican market leaders, with a market share of 28.6% as of December 31, 2004 (source: Sistema de Intercambio de Bancos, December 2004).
Bancomer’s retail products that experienced the highest growth rates were consumer loans and credit cards, which jointly increased by 62.8% in 2004. Bancomer issued 1.5 million credit cards during 2004 and nearly 500,000 “Creditón Nómina” loans were granted. Bancomer also granted more than 39,000 car loans in 2004.
Bancomer’s Corporate and Institutional Banking subunit focused its resources on granting loans to SMEs, with an increase of 46% compared to 2003. The commercial loan portfolio for large corporations was approximately €5.9 billion by December 31, 2004, a 28% increase compared to 2003. Bancomer’s mortgage portfolio began to improve in 2004. The total mortgage portfolio (excluding UDI trusts) was €865 million, an increase of 22.9% over 2003.
In January 2005, Bancomer bought Hipotecaria Nacional, one of the leading home financiers in Mexico, with the goal of complementing BBVA Bancomer’s commercial mortgage loan business with residential mortgage loans, while also providing Bancomer with a new segment of customers for cross-marketing purposes.
Bancomer is the leader in Mexico in terms of customer deposits, with a market share of 32.7% as of December 31, 2004 (source: Sistema de Intercambio de Bancos, December 2004). In 2004, Bancomer continued its policy of increasing the range of deposit products available while focusing on increasing the volume of lower cost deposits. Much of the growth in deposits is due to the success of the various “Savings Fortnights” organized during 2004, which allowed Bancomer to maintain its position as market leader in this segment.
As part of its initiative to offer diversified products in the area of mutual funds, Bancomer launched the “Fondo Triple,” a guaranteed-return fund that proved highly successful in 2004. BBVA Bancomer had a market share in mutual funds of 19.3%, 26 basis points higher than at the close of 2003.
In the area of pension fund management and insurance, the Group operates in Mexico through Afore BBVA Bancomer in pensions, BBVA Pensiones Bancomer in the annuities business, BBVA Seguros Bancomer in insurance and Preventis-Meximed (recently merged with Vitamédica) in the area of health.
Pension funds in Mexico did not experience positive growth or returns in 2004 as a result of both the slow recovery of employment rates and the volatility of financial markets, all of which had a negative impact on the income of pension fund managers. However, even under these circumstances, Afore Bancomer increased its fee income slightly and enjoyed increases of 13.3% in net profit and 65.6% in net attributable profit.
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BBVA’s insurance companies in Mexico had a joint net attributable profit of €55 million, a 23.8% increase over 2003. BBVA Seguros Bancomer experienced a 15.8% increase in the volume of premiums managed.
Argentina
The Argentine economy experienced a severe crisis in 2001 and 2002, marked by the continued movement of capital out of Argentina, the end of convertibility of the peso, the devaluation of the peso and the return of inflation. The emergency measures adopted by the Argentine government in response to the economic crisis at the end of 2001 and during 2002 that affected our results of operations included: freezing public debt payments, ending convertibility between the Argentinean peso and the dollar, imposing cash withdrawal limits on sight and savings accounts, re-scheduling of term deposit maturities and converting dollar assets and liabilities to pesos at different exchange rates. In 2001, we took substantial provisions and write-downs totaling €1,354 million relating to our investments in, and exposure to, Argentina. In 2002, we took an additional provision of €131 million. In 2004, the Argentine economy stabilized and experienced significant growth, but uncertainty regarding the scope, sustainability and pace of the recovery remained.
In 2004, the GDP of Argentina grew by 8% and the Argentine economy also benefited from an increase in domestic and foreign investment. Inflation increased to 6.1% in 2004 and interest rates remained steady at an average rate of approximately 3%, which was similar to the average rate in 2003. The exchange rate of the Argentine peso against the U.S. dollar ranged between ARP2.85 and ARP3.00 to $1.00, which was similar to the exchange rates between these currencies in 2003. However, the Argentine peso depreciated 8.1% against the euro in 2004.
The financial sector of the Argentine economy benefited from an increase in deposits in 2004, principally due to the increased liquidity resulting from government tax incentives that encouraged customers to deposit their savings in banking products. Banco Francés also benefited from an increase in lending of 25% in 2004, which had fallen for several prior years.
Banco Francés increased its lending activity during 2004, which had been significantly reduced in prior years due to the Argentine financial crisis, and continued to provide basic bill payment and check cashing services, which had generated the majority of its revenues in 2002 and 2003. The financial brokerage business of Banco Francés also improved in 2004.
Loans to the private sector (mainly personal loans, credit cards to individuals and export financing, through financial trusts and short-term credit lines, for companies) increased by 19.3% in 2004. Banco Francés focused successfully on reducing its credit exposure to the public sector in 2004, leading to an improvement in its asset mix.
As a result of these developments, Banco Frances’s net interest income increased 286.3% in 2004, compared to 2003, while its net fee income increased 29.3% in 2004 compared to 2003. The efficiency ratio of Banco Frances improved to 47.7%. Banco Frances also implemented a debt rescheduling policy of the non performing loans portfolio, leading to a decrease in provisions for non performing loans during 2004 compared to 2003.
These improvements have lead to an increase in net attributable profit in 2004, despite the significant costs incurred in making payments to clients under judicial orders which permitted clients to withdraw deposits at a higher peso-dollar exchange rate than the prevailing market rate.
Banco Francés designed a compliance plan to comply with new minimum capital requirements established by the Argentine Central Bank in January 2004. The most important measures taken were (i) a capital increase with a par value of ARP385 million, which we subscribed to by capitalizing a €78 million loan we granted to Banco Francés and (ii) the sale to us by Banco Francés of its entire interest in Banco Francés (Cayman) Limited for $238.5 million. As a result of these and other measures, Banco Francés had net assets of over ARP1.6 billion at December 31, 2004, more than ARP1.0 billion above the required minimum.
BBVA’s affiliate, the Consolidar Group, operates in the Argentine pension fund sector and had more than 1.5 million participants and assets under management of ARP 10,378 million, with a market share of 19.6% as of November, 2004 (source: Superintendecia Administradora de Fondos de Jubilaciones y Pensiones). For 2004, Consolidar Group’s net attributable profit was €17 million.
Chile
In 2004, the macroeconomic situation in Chile was generally favorable and the country experienced GDP growth of 5.6%, compared to 3.2% in 2003. Favorable economic growth was due in part to improvements in exports and the recovery of internal demand. An increase in the prices of raw materials and the appreciation in the value of the Chilean peso kept inflation low in 2004. However, interest rates rose 50 basis points following increases in U.S. lending rates, to close at December 31, 2004 at 2.25%.
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The financial sector in Chile experienced a considerable increase in loans, from a growth rate of 5.7% during 2003 to approximately 13% in 2004. BBVA Chile had lending growth of 16.9% and a market share in lending of 7.7% in 2004, compared to 7.2% in 2003 (source: the Supertintendencia Bancaria as of November 31, 2004). BBVA Chile’s consumer-banking subunit experienced a growth rate of 16.9%, with a good performance in mortgage loans and new products such as the Mini Visa. BBVA Chile’s corporate banking subunit’s total net lending increased by 5.1% and experienced a 22.4% increase in overall wholesale banking.
BBVA Chile’s deposits increased by 27% in 2004, primarily due to the success of products such as the PLUS time deposit. BBVA Chile’s market share in deposits increased to 8.6% in 2004 (source: the Supertintendencia Bancaria as of November 31, 2004) compared to 7.8% in 2003.
BBVA’s Chilean pension fund manager affiliate, AFP Provida, had funds under management of $19,134 million as of December 31, 2004. Provida’s market share in pension fund management was 31.5% as of December 31, 2004, according to the Superintendencia de Administradoras de Fondos de Pensiones of Chile, with approximately 2.9 million pension fund participants. In 2004, Provida earned a net attributable profit of €15 million.
Colombia
The Colombian economy experienced an increase in GDP of 3.8% in 2004, as well as moderate inflation and relatively stable interest rates.
Total net lending by BBVA Colombia (formerly known as Banco Ganadero) exceeded €1.3 billion in 2004, an increase of 28.1% compared to 2003. BBVA Colombia’s market share of lending increased by 1% in 2004 to 8.0% (source: Superintendencia Bancaria of Colombia, November 2004). This growth was experienced across all BBVA Colombia’s subunits. In its consumer banking subunit some of the most important products were the “Creditón”, “easy mortgages” and the launch of the mini-sized cards. Its corporate banking subunit, some new products were the first credit card for SMEs in Colombia, business cards, the agricultural credit campaign and the CDT business gift.
In 2004, BBVA Colombia’s deposits increased by 21.6%, increasing its market share to 8.1% (source: Superintendencia Bancaria of Colombia, November, 2004). This growth was principally due to the success of low-cost products, particularly savings accounts.
BBVA operates in the Colombian pensions market through AFP BBVA Horizonte Pensiones y Cesantías, with an 18.2% market share in pension funds managed (source: Superintendencia Bancaria of Colombia, November, 2004). Net attributable profit from AFP BBVA Horizonte Pensiones y Cesantías was €7 million in 2004, a 24.2% increase from 2003.
Panama
The Panamanian economy experienced an increase in GDP of 4% during 2004, which allowed the financial sector of the economy to improve the quality of its credit portfolio. BBVA Panama’s total net lending increased by 14.7% while deposits increased by 11.1%, principally due to strong growth in banking business with private individuals and the success of new products targeted at specific groups based on their potential for growth.
BBVA operates in the pensions market in Panama through two companies, BBVA Horizonte and Progreso, which manage a total of €263 million.
Paraguay
The most significant development in Paraguay’s economy in 2003 was the continued sharp decline in interest rates from 17% to 6%. The Paraguayan economy in 2004 also benefited from low inflation, the stability of the guarani (local currency) and a 2.7% increase in GDP.
BBVA Paraguay focused its actions on price management and lending, seeking to diversify its customer base to reduce risk and increase interest and fee income. By December 31, 2004 BBVA Paraguay’s total net lending increased by 38.1% compared to 2003, with a market share of 17.3% (source: Superintendencia de Bancos, November, 2004). Deposits increased by 39.4% in 2004 compared to 2003, with a market share of 15.8% (source: Superintendencia de Bancos, November, 2004).
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Peru
The Peruvian economy experienced an increase in GDP of approximately 4.5% during 2004. The Peruvian economy in 2004 also benefited from low inflation, the appreciation of the sol (local currency) against the dollar and historically low interest rates.
In 2004, BBVA Banco Continental’s loans and deposits increased by 2.4% and 1.5% compared to 2003, with market shares of 20.8% and 25.9%, respectively (source: Superintendencia de Banca y Seguros of Peru, November, 2004).
BBVA operates in the Peruvian pension fund sector through AFP BBVA Horizonte, with assets under management of $1,954 million as of December 31, 2004, representing a market share of 25.5% (source: Superintendencia de Banca y Seguros of Peru, December, 2004) and a net attributable profit of €11 million.
Puerto Rico
The Puerto Rican economy experienced an increase in GDP of approximately 2.5% in 2004 compared to 1.6% in 2003.
In retail banking, BBVA Puerto Rico’s car financing division (BBVA Auto) granted over $400 million in new loans, an 11% increase over 2003, with an aggregate portfolio of approximately $1 billion, while in the mortgage market, BBVA Puerto Rico increased its portfolio of mortgage loans by $178 million, a 40% increase over 2003. The number of loans awarded to SME’s by BBVA Puerto Rico in 2004 increased by 478%.
In September 2004, the BBVA Puerto Rico issued $150 million in floating rate senior notes maturing in 2007 and $50 million in subordinated notes maturing in 2014.
BBVA operates in the Puerto Rican insurance market through BBVA Seguros INC, which had €18 million in insurance premium revenues in 2004, an increase of 17.8% over 2003.
Uruguay
The Uruguayan economy experienced an increase in GDP of approximately 10% in 2004, with inflation at approximately 9%. Uruguay’s sovereign risk in 2004 was the lowest level since the financial crisis of 2002. The peso (local currency) appreciated against the U.S. dollar.
During 2004, BBVA Uruguay’s market share in lending was 10.7% (source: Banco Central of Uruguay, November, 2004). In 2004, BBVA Uruguay implemented a strict pricing policy for deposits, which succeeded in reducing its average cost to below 1%, while maintaining the aggregate amount of deposits stable with a market share of 10.2% (source: Banco Central of Uruguay, November, 2004).
Despite the trends in the exchange rate, since all liquid assets are invested in U.S. dollars, and inflation, the BBVA Uruguay managed to reduce its losses to €5 million in 2004, as compared to a €20 million loss in 2003.
Venezuela
The Venezuelan economy experienced an increase in GDP of approximately 12.3% in 2004, principally due to high oil prices. Increased levels of investments denominated in foreign currencies resulting from oil exports and the strict control of exchange rates lead to a significant increase in liquidity, with a corresponding significant fall in interest rates.
In 2004, BBVA Banco Provincial’s management sought to adapt its strategic objectives to the economic situation of the country. Lending and deposits increased by 91.4% and 47.9%, respectively, compared to 2003.
BBVA operates in the Venezuelan insurance market through BBVA Seguros Provincial, which had net attributable profit of €3 million in 2004, with €6 million in insurance premium revenues in 2004 generated by bank assurances granted of €7 million, an increase of 11.8% and 13.7%, respectively, over 2003.
Other countries
We also have pension fund management operations in Bolivia and the Dominican Republic.
During 2004, we sold our pension fund management business in El Salvador for U.S.$42.8 million (€34.76 million). The sale generated a profit of €12.3 million.
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International Private Banking
The International Private Banking business unit focuses on providing investment advice and asset management services to high net worth individuals. In 2004, the process for the implementation and improvement of a management model for the International Private Banking business unit, and the customer segmentation process began in 2003, was completed. The area closed its offices in Latin America and all the unit’s activities are being concentrated in the offices of Andorra, Zurich and Miami.
In 2004, our International Private Banking business unit faced a difficult economic scenario, primarily due to volatility in international financial markets and the depreciation of the U.S. dollar against the euro. Total funds managed reached €1.3 billion at December 31, 2004. Fees generated in 2004 increased by 3.3% over 2003 to €145 million with a net attributable profit for 2004 of €68 million.
The Corporate Activities and Other business area includes BBVA’s portfolio of strategic and financial investments, the Assets and Liabilities Management Committee (ALCO) and other BBVA units that cannot be assigned to any other business area. The results from operations of the Corporate Activities and Other business area include the amortization of goodwill (except for goodwill associated with business and real estate projects, which is included in our Business and Real Estate Projects business unit) and provisions associated with country risk and other items that cannot properly be allocated to any one business area.
Assets and Liabilities Management Committee
The Assets and Liabilities Management Committee (“ALCO”) manages the group’s overall financing needs and interest and exchange rate risks. The ALCO also manages the group’s investments and capital resources in order to improve the return on capital for our shareholders.
ALCO’s hedging policy permitted BBVA to decrease the negative effect of exchange rate depreciation on reserves by €170 million at a cost of €47 million net of taxes. In addition, ALCO’s hedging policy contributed €103 million, net of taxes, to BBVA’s income from market operations in 2004.
ALCO also actively manages interest rate risk. As of December 31, 2004, BBVA’s portfolio of fixed-income assets, which is held to reduce the negative effect on BBVA’s net interest income of a fall in interest rates, amounted to €22,987 million. The portfolio generated €310 million of net interest income and €62 million of net trading income in 2004.
Large Industrial Corporations
The Large Industrial Corporations unit manages BBVA’s strategic investments in certain large industrial companies, mainly in the Spanish telecommunications and energy sectors. In 2004, this unit had a net attributable profit of €408 million, an increase of 53.7% compared to 2003. During 2004, €689 million of investments and €749 million of divestments were made, which generated capital gains of €168 million. Divestments made in January 2004, amounting to €304 million, were intended to generate cash to finance part of the acquisition of the minority interest in Bancomer.
As of December 31, 2004, the market value of our large industrial corporations portfolio amounted to approximately €5 billion, with unrealized capital gains of approximately €1.6 billion.
Financial Holdings
The financial holdings unit manages BBVA’s financial investments. As of December 31, 2004, this unit owned our interests in Banca Nazionale del Lavoro and Bradesco, having sold its interests in Banco Atlántico in March, 2004 pursuant to a tender offer by Banco Sabadell for all of Banco Atlántico’s outstanding shares, giving rise to a €218 million capital gain.
Supervision and Regulation
The Spanish government traditionally has been closely involved with the Spanish banking system, both as a direct participant through its ownership of the ICO and as a regulator retaining an important role in the regulation and supervision of financial institutions.
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The Bank of Spain
The Bank of Spain was established in 1962 as a public law entity (entidad de derecho público) that operates as Spain’s autonomous central bank. In addition, it has the ability to function as a private bank. Except in its public functions, the Bank of Spain’s relations with third parties are governed by private law and its actions are subject to the civil and business law codes and regulations.
Until January 1, 1999, the Bank of Spain was also the sole entity responsible for implementing Spanish monetary policy. For a description of monetary policy since the introduction of the euro, see “—Monetary Policy—General” and “—New Monetary Policy in the EMU”.
Since January 1, 1999, the Bank of Spain has performed the following basic functions attributed to the European System of Central Banks (“ESCB”):
Recognizing the foregoing functions as a fully-fledged member of the Euroystem, the Ley de Autonomía del Banco de España (the Bank of Spain Law of Autonomy) stipulates the performance of the following functions by the Bank of Spain:
Subject to the rules and regulations issued by the Ministry of Economy, the Bank of Spain has the following supervisory powers over Spanish banks:
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Fondo de Garantía de Depósitos
The Fondo de Garantía de Depósitos en Establecimientos Bancarios (“FGD”), which operates under the guidance of the Bank of Spain, guarantees bank deposits up to €20,000 per customer, which is the minimum insured amount for all EU member banks. Pursuant to Bank of Spain regulations, the FGD may purchase doubtful loans or may acquire, recapitalize and sell banks that are experiencing difficulties.
The FGD is funded by annual contributions from member banks. The rate of such contributions in 2004 was 0.06% of the year-end amount of deposits to which the guarantee extended. Nevertheless, once the capital of the FGD exceeds its requirements, the Minister of Economy may reduce the member banks’ contributions and, when the FGD’s funds exceed the capital requirements by one percent or more of the member banks’ deposits, such contributions may be suspended.
In order to safeguard the stability of its members, the FGD may also receive contributions from the Bank of Spain. At December 31, 2004, all of the Spanish banks belonging to BBVA were members of the FGD and thus obligated to make annual contributions to it.
Fondo Garantía Inversores
Royal Decree 948 of August 3, 2001 regulates investor guarantee schemes related to both investment firms and to credit institutions. These schemes are set up through an investment guarantee fund for securities broker and broker-dealer firms and the deposit guarantee funds already in place for credit institutions. A series of specific regulations have also been enacted, defining the system for contributing to the funds.
The General Investment Guarantee Fund Management Company was created in a relatively short period of time and is a business corporation with capital in which all the fund members hold an interest. Member firms must make a joint annual contribution to the fund equal to 0.06% over the 5% of the securities that they hold on their client’s behalf. However, it is foreseen that these contributions may be reduced if the fund reaches a level considered to be sufficient.
Liquidity Ratio
In an effort to implement European monetary policy, effective January 1, 1999, the ECB and the national central banks of the member states of the European Monetary Union (“EMU”) adopted a regulation that requires banks to deposit an amount equal to two percent of their qualifying liabilities, as defined by the regulation, with the central bank of their home country. These deposits will earn an interest rate equal to the average interest rate of the ESCB. Qualifying liabilities for this purpose include:
Furthermore, the liquidity ratio is set at 0% instead of 2% for those qualifying liabilities that have a maturity over two years and are sold under repurchase agreements.
Investment Ratio
In the past, the government used the investment ratio to allocate funds among specific sectors or investments. As part of the liberalization of the Spanish economy, it was gradually reduced to a rate of zero percent as of December 31, 1992. However, the law that established the ratio has not been abolished and the government could re-impose the ratio, subject to applicable EU requirements.
Capital Adequacy Requirements
As part of a program to modernize Spain’s banking regulations, capital adequacy requirements were revised in 1985 and, pursuant to EU directives, amended as of January 1, 1993. The capital adequacy requirements are applicable to BBVA on both a consolidated and individual basis.
The principal characteristics of the capital adequacy requirements pursuant to EU directives are a distinction between “core” and “complementary” capital and the adoption of a ratio of stockholders’ equity to risk-weighted assets. Core capital generally includes:
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Complementary capital generally includes certain nonvoting equity, revaluation and similar reserves, and subordinated and perpetual debt. The computation of both core and complementary capital is subject to provisions limiting the type of stockholding and the level of control which these stockholdings may give a banking group. The level of non-perpetual subordinated debt taken into account for the calculation of complementary capital may not exceed 50% of core capital. The total amount of complementary capital admissible for computing total capital may not exceed the total amount of core capital.
The consolidated total of core and complementary capital of a banking group calculated in the manner described above may not be less than eight percent of the group’s risk-weighted assets net of specified provisions and amortizations. The calculation of total risk-weighted assets applies minimum multipliers of 0%, 20%, 50% and 100% to the group’s assets. Countries with special loan arrangements with the International Monetary Fund, which have not renegotiated their foreign debt in the five preceding years, receive a 0% risk weight. Pursuant to Bank of Spain regulations, the following loans also receive a 0% risk weighting:
All other loans are weighted at 100%; however, such weighting may be lower if the loan is guaranteed or secured. Off-balance sheet assets are also included in the calculation of risk-weighted assets.
The computation of core capital is subject to reductions of capital in amounts equivalent to unrealized losses on investment securities that are not charged to income and are accounted for as assets under the caption “Asset Accrual Accounts”. See Note 16 to the Consolidated Financial Statements.
The Basel Committee on Banking Supervision (the “Basel Committee”), which includes the supervisory authorities of twelve major industrial countries, has adopted an international framework (the “Basel Accord”) for capital measurement and capital standards of banking institutions. The framework provides:
Basel Committee on Banking Supervision published a new Basel capital accord (also known as Basel II) which, when finalized, will replace the Basel Accord, and it will come into effect in December, 2006.
As described above, the capital adequacy of Spanish banks is regulated by EU directives applicable to the Spanish banking system as well as to the banking systems of other EU member states. Certain EU member states are parties to the Basel Accord. Spain
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joined the Basel Accord on February 1, 2001. Each national authority that is a party to the Basel Accord has implemented it in a significantly different fashion. The capital requirements imposed by the Basel Accord are in many respects similar to those imposed by EU directives, Spanish law and the Bank of Spain.
Banks in EU countries are permitted to net the credit exposure arising from certain interest rate and foreign exchange-related derivative contracts (rather than include the entire notional amount of such contracts) in calculating their total risk-adjusted assets for purposes of calculating their capital adequacy ratios, provided that such derivative contracts are subject to regulatory limitations on total credit exposure and the relevant regulatory authorities approve the inclusion in risk-adjusted assets of such credit risks on a net basis.
Spanish banks are permitted to include the net credit exposure arising from interest rate and foreign exchange transactions related to derivative products provided the following conditions are met:
In addition, the Bank of Spain may not accept the accounting treatment of netting if the conditions set forth above are not met or if the Bank of Spain does not concur with the legality or validity of the netting provisions.
Concentration of Risk
The Bank of Spain regulates the concentration of risk. Since January 1, 1999, any exposure to a person or group exceeding 10% of a group’s or bank’s regulatory capital has been deemed a concentration. The total amount of exposure represented by all of such concentrations may not exceed 800% of regulatory capital. Exposure to a single person or group may not exceed 25% (20% in the case of an affiliate) of a bank’s or group’s regulatory capital.
Legal and Other Restricted Reserves
We are subject to the legal and other restricted reserves requirements applicable to Spanish companies. Please see “—Capital Adequacy Requirements”. See Note 24 to the Consolidated Financial Statements.
Allowance for Possible Loan Losses
For a discussion of the Bank of Spain regulations relating to allowances for possible loan losses and country risk, see “—Selected Statistical Information—Assets—Loan Loss Reserve”.
Regulation of the Disclosure of Fees and Interest Rates
Interest rates on most kinds of loans and deposits are not subject to a maximum limit. Banks must publish their preferential rates, rates applied on overdrafts, and fees and commissions charged in connection with banking transactions. Banking clients must be provided with written disclosure adequate to permit customers to ascertain transaction costs. The foregoing regulations are enforced by the Bank of Spain in response to bank client complaints.
Law 44/2002 concerning measures to reform the Spanish financial system contained a rule concerning the calculation of variable interest applicable to loans and credit secured by mortgages, bails, pledges or any other equivalent guarantee.
Employee Pension Plans
Under the relevant collective labor agreements, BBVA and some of its subsidiaries provide supplemental pension payments to certain active and retired employees and their beneficiaries. These payments supplement social security benefits from the Spanish state. See Note 3.j. to the Consolidated Financial Statements.
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Dividends
If a bank meets the Bank of Spain’s minimum capital requirements described above under “—Capital Adequacy Requirements”, it may dedicate all of its net profits to the payment of dividends, although, in practice, banks consult with the Bank of Spain before declaring a dividend. We calculate that as of December 31, 2004, we had approximately €4.5 billion of unrestricted reserves in excess of applicable capital and reserve requirements available for the payment of dividends. Compliance with such requirements notwithstanding, the Bank of Spain may advise a bank against the payment of dividends on grounds of prudence. In no event may dividends be paid from non-distributable reserves. Banks which fail to comply with the capital adequacy ratio by more than 20% are required to devote all of their net profits to increasing their capital ratios. Banks which fail to meet the required ratio by 20% or less must obtain prior approval of the Bank of Spain to distribute any dividends and must devote at least 50% of net profits to increasing their capital ratios. In addition, banks, and their directors and executive officers, that do not comply with the liquidity and investment ratios and capital adequacy requirements may be subject to fines or other sanctions. Compliance with the Bank of Spain’s capital requirements is determined on both a consolidated and individual basis. BBVA’s Spanish subsidiaries are in compliance with these capital adequacy requirements on both a consolidated and individual basis. If a bank has no net profits, the board of directors may propose at the general meeting of the stockholders that a dividend be declared out of retained earnings.
The Bank of Spain recommends that interim dividends not exceed an amount equal to one-half of net attributable profit from the beginning of the corresponding fiscal year. No interim dividend may be declared when a bank does not meet the minimum capital requirements and, according to the recommendations of the Bank of Spain, interim dividends may not be declared until the Bank of Spain has sufficient knowledge with respect to the year’s profits. Although banks are not legally required to seek prior approval from the Bank of Spain before declaring interim dividends, the Bank of Spain has asked that banks consult with it on a voluntary basis before declaring interim dividends.
Limitations on Types of Business
Spanish banks are subject to certain limitations on the types of businesses in which they may engage directly, but they are subject to few limitations on the types of businesses in which they may engage indirectly.
Mortgage Legislation
Spanish law limits the prepayment penalties on floating rate mortgage loans and limits the notarial costs and registration fees charged to borrowers in connection with renegotiation of mortgage terms on fixed and floating rate mortgages.
Mutual Fund Regulation
Mutual funds in Spain are regulated by the Dirección General del Tesoro y Política Financiera del Ministerio de Economía (the Ministry of the Economy) and by the Comisión Nacional del Mercado de Valores (“CNMV”). All mutual funds and mutual fund management companies are required to be registered with the CNMV. Spanish mutual funds are subject to investment limits with respect to single sectors or companies and overall portfolio diversification minimums. In addition, periodic reports including a review of the fund’s performance and any material events affecting the fund are required to be distributed to the fund’s investors and filed with the CNMV.
U.S. Regulation
Banking Regulation
By virtue of our branch in New York, our agency in Miami and our ownership of commercial banks in Texas, California and Puerto Rico, we are subject to the U.S. Bank Holding Company Act of 1956, as amended, which imposes certain restrictions on the activities in which BBVA and its subsidiaries may engage in the United States and subjects us to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). In addition, certain of our banking activities in the United States are subject to supervision by state banking authorities. We have two securities subsidiaries operating in New York and Puerto Rico, which are regulated by the SEC and the National Association of Securities Dealers.
On June 12, 2000, BBVA and its Miami and New York offices entered into an agreement (the “Written Agreement”) with the Federal Reserve Board. The Written Agreement required BBVA, on behalf of its U.S. offices, to establish programs designed to identify and report known or suspected criminal activity with respect to money laundering and to comply with rules and regulations related to anti-money laundering compliance. BBVA responded to the Written Agreement by enhancing its U.S. internal controls through its Office of the Country Manager, implementing improved compliance policies and procedures, transferring its U.S. private banking activities from its New York branch to its Miami agency, and adopting an enhanced customer due diligence program. These remedial actions were subject to examination by the Federal Reserve Bank of New York and the New York State Banking Department. On February 21, 2003, the Written Agreement was terminated.
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U.S. Foreign Corrupt Practices Act
BBVA, as well as all other foreign private issuers with a class of securities registered pursuant to Section 12 of the U.S. Securities Exchange Act of 1934, is subject to the U.S. Foreign Corrupt Practices Act. This Act generally prohibits such issuers and their directors, officers, employees and agents from using any means or instrumentality of U.S. interstate commerce in furtherance of any offer or payment of money to any foreign official or political party for the purpose of influencing a decision of such person in order to obtain or retain business. It also requires that the issuer maintain books and records and a system of internal accounting controls sufficient to provide reasonable assurance that accountability of assets is maintained and accurate financial statements can be prepared. Penalties, fines and imprisonment can be imposed for violations of such Act.
Monetary Policy
General
On May 2, 1998, the EU established the bilateral conversion rates among the member countries that make up the EMU, and on December 31, 1998 the EU established the irrevocable conversion rates between the euro and each of the member countries of the EMU. The exchange rate in Spain was fixed at 166.386 pesetas per euro.
Monetary policy within the 12 members of the euro zone is set by the ECB. The ECB has itself set the objective of containing inflation and will adjust interest rates in line with this policy. It has further declared that it will not set an exchange rate target for new currency.
As of January 1, 1999, the euro became the national currency of the Spanish monetary system, replacing the peseta. However, the peseta was used as a unit of account in any judicial/legal instrument as a fraction of the euro and according to the exchange rate during the transitory period (from January 1, 1999 through December 31, 2001).
On January 1, 1999, the monetary system adopted the euro exclusively as a unit of account. From this date through February 28, 2002, the Bank of Spain, commercial banks, savings banks and credit co-operatives exchanged pesetas into euro free of charge but did not exchange euro into pesetas. Beginning July 1, 2002, only the Bank of Spain was able to perform this exchange, as determined by the Ministry of the Economy.
As of January 1, 2002, all legal instruments that were not denominated in euro during the transitory period were understood to be expressed in the euro unit of account, subject to the established conversion and rounding procedure.
Monetary Policy in the EMU
The integration of Spain into the EMU on January 1, 1999 implied the yielding of monetary policy sovereignty to the ESCB. The ESCB is composed of the ECB and the national central banks of the 12 member countries that form the EMU.
The ESCB determines and executes the single monetary policy of the 12 member countries of the EMU. The ESCB collaborates with the central banks of member countries to take advantage of the experience of the central banks in each of its national markets. The basic tasks to be carried out by the ESCB include:
In addition, the EU Treaty establishes a series of rules designed to safeguard the independence of the system, in its institutional as well as in its administrative functions.
Law Reforming the Spanish Financial System
On November 22, 2002, the Spanish government approved theLey de Medidas de Reforma del Sistema Financiero (“Law 44/2002”), which amended, among others, the Spanish Securities Markets Act of 1988 (the “Securities Markets Act”), the Credit Entities Discipline and Intervention Law and Private Insurance law. Law 44/2002 affects the following matters: market transparency
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(concept of privileged information); accounting practices of companies (in particular, independence and reliability of external audits and creation of audit committees for every listed company); systems and risk coverage (promotion of the integration of various existing entry settlement systems into one); securitization (assignment of credit rights against public administration within a period before the bankruptcy of the companies, mortgage transfer certificates, territorial bonds, etc.); electronic money (definition and issuance); pre-emptive rights; collective investment schemes (merger of collective investments schemes and guarantees and security interest); venture capital (investments in its group companies, etc.); ring-fencing transactions (extending protection against bankruptcy to some special financial master transactions and OTC transactions); savings banks (legal regime ofcuotas participativas, or participating shares) and other rules concerning the disciplinary regime for listed companies.
On June 18, 2003, the Spanish Government approved the Ley de Transparencia (“Law 26/2003”), modifying both the Spanish Securities Markets Act and Law 22/2003, to reinforce the transparency of information regarding listed Spanish companies. This law adds a new chapter, Title X, to the Securities Markets Act, which (i) requires disclosure of shareholder agreements relating to listed companies, (ii) regulates the operation of the general shareholders’ meetings and of the boards of directors of listed companies, (iii) requires the publication of an annual report of corporate governance and (iv) establishes measures designed to increase the availability of information to shareholders.
In addition, this law amends the Ley de Sociedades Anonimas (the “Corporate Law”), and requires: (i) offering to shareholders the possibility of exercising voting rights directly or remotely by delegation, so long as the identity of the person who exercises the vote can be properly guaranteed, (ii) an increase in the information that shareholders have the right to obtain from the company and (iii) that existing regulation of the duties and responsibilities of directors be expanded.
New Regulations
Transition to International Financial Reporting Standards
Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an European Union member state and whose securities are admitted to trading on a regulated market of any member state must prepare their consolidated financial statements for the years beginning on or after January 1, 2005 in conformity with the IFRS. Therefore, BBVA will be required to prepare its consolidated financial statements for the year ending December 31, 2005 in conformity with the IFRS which had been ratified by the European Union at that date.
Under IFRS 1, First-Time Adoption of International Financial Reporting Standards, BBVA’s consolidated financial statements for 2005 must necessarily include, for comparison purposes, a consolidated balance sheet as of December 31, 2004, and a consolidated statement of income for the year then ended prepared in accordance with IFRS.
On December 22, 2004 the Bank of Spain issued Circular 4/2004 on Public and Restricted Financial Reporting Standards and Model Financial Statements, which sets forth for new accounting rules applicable to Spanish banks based on IFRS.
We are currently implementing a plan for transition to IFRS, which includes, among other things, an analysis of the differences between Spanish GAAP and IFRS, the selection of the accounting policy to be applied when alternative policies are permitted and an assessment of changes in reporting procedures and systems we will be required to undertake in order to transition to IFRS.
As of the date of this Annual Report, we are in the process of preparing our Consolidated Financial Statements for the year ended December 31, 2004 in accordance with the IFRS currently in force. However, continuing developments in IFRS could occur until December 31, 2005 and, accordingly, there is uncertainty concerning what IFRS will be in effect when we prepare our first consolidated financial statements in accordance with IFRS as of and for the year ended December 31, 2005. Consequently, to date, we are unable to estimate the net effect that applying IFRS will have on our results of operations or financial condition, or any component thereof. The effect of such differences, however, may be material, individually or in the aggregate, to financial items reported in our Consolidated Financial Statements relating to, among other things, the accounting treatment for derivative instruments, financial instruments, intangible assets, deferred costs, business combinations and goodwill. The adoption of IFRS may, as a result, affect the valuation methods we use to measure and evaluate our performance and make it more difficult to compare our results of operations and financial condition for periods in respect of which IFRS is applied to our results of operations and financial conditions to periods in respect of which Spanish GAAP was applied.
Order on Securities Information
On September 27, 2004 the Order on Securities Information (EHA/3050/2004) was published in the Official Gazette.
The order is part of an effort to increase the transparency of companies with securities listed on a public stock exchange, which has been implemented by legislation that includes the Law on Reform of the Financial System (44/2002) and Law 26/2003, which amended the Securities Market Law and the Corporations Law in order to increase the transparency of listed corporations.
The transparency laws imposed new obligations with regard to corporate information (e.g., to publish an annual corporate governance report which, among other matters, must include information on related-party transactions between the company and its shareholders, directors and executives).
The order imposes an obligation on companies issuing securities which are admitted to listing on any official Spanish secondary market (e.g., the stock exchanges, the Association of Financial Asset Brokers (AIAF) fixed income market and the financial futures exchange) to include in their biannual information quantified data on all their transactions with related parties.
This obligation is in addition to the obligation to include information on related-party transactions in the annual corporate governance report, as provided by the Corporate Governance Report Order (ECO/3722/2003).
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Royal Decree-Law on Measures to Promote Productivity (5/2005)
The Spanish government has published the Royal Decree-Law on Measures to Promote Productivity (5/2005). Among other things, the measures include:
Implementation of the EU Prospectus Directive
The first measure seeks partly to implement the EU Prospectus Directive into Spanish law. The EU Prospectus Directive governs the content of prospectuses that must be delivered when securities are offered to the public or admitted to listing on a regulated market in the EU. The EU Prospectus Directive must be implemented by member states by July 1, 2005.
The measure amends Part III of the Securities Market Act, including Articles 25 to 30(2) concerning primary markets.
Securities represented by book entry
The new measures also eliminate the requirement that certain securities represented by book entry must be executed in a public instrument. Under Royal Decree-Law 5/2005, a document delivered by the issuer with the key terms of such securities is sufficient.
Debt securities
Royal Decree 5/2005 adds a new Chapter II to Part III (on primary markets) of the Securities Market Act concerning issues of bonds and other debt securities.
The new Chapter II removes certain requirements imposed by Spanish legislation on certain issues of bonds and other debt securities. The following requirements have been removed:
C. Organizational Structure
Below is a simplified organizational chart of BBVA’s significant subsidiaries as of April 30, 2005. An additional 383 companies are domiciled in the following countries: Germany, Brazil, Belgium, Costa Rica, Cuba, Chile, Ecuador, Bolivia, El Salvador, Spain, France, Netherlands, Ireland, Italy, Luxembourg, Morocco, Mexico, United Kingdom, Switzerland, United States, Canada, Panama, Paraguay, the Dominican Republic and Uruguay.
Subsidiary
Country ofIncorporation
Activity
Administradora de Fondos Para el Retiro-Bancomer, S.A. de C.V.
Administradora de Fondos de Pensiones Provida
Banc Internacional D’Andorra, S.A.
Banco Bilbao Vizcaya Argentaria (Portugal), S.A.
Banco Bilbao Vizcaya Argentaria Puerto Rico, S.A.
Banco Continental, S.A.
Banco de Crédito Local, S.A.
Banco Provincial S.A.—Banco Universal
BBVA Chile, S.A.
BBVA Banco Francés, S.A.
BBVA Colombia, S.A.
Grupo Financiero BBVA Bancomer, S.A. de C.V.
BBVA Privanza Bank (Switzerland) Ltd.
BBVA Privanza Bank (Jersey) Ltd.
BBVA Seguros, S.A.
Consolidar A.F.J.P., S.A.
Finanzia, Banco de Credito, S.A.
Uno-e Bank, S.A.
Laredo National Bancshares Inc.(1)
Valley Bank
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D. Property, Plants and Equipment
We own and rent a substantial network of properties in Spain and abroad, including 3,375 branch offices in Spain and, principally through our various affiliates, 3,473 branch offices abroad at December 31, 2004. Approximately 23.9% of these properties are rented in Spain from third parties pursuant to short-term leases that may be renewed by mutual agreement. The remaining properties, including most of our major branches and our headquarters, are owned by us.
E. Selected Statistical Information
The following is a presentation of selected statistical information for the periods indicated. Where required under Industry Guide 3, we have provided such selected statistical information separately for our domestic and foreign activities, pursuant to our calculation that our foreign operations are significant according to Rule 9-05 of Regulation S-X.
Average Balances and Rates
The tables below set forth selected statistical information on our average balance sheets, which are based on the beginning and month-end balances in each year. We do not believe that monthly averages present trends materially different from those that would be presented by daily averages. Interest income figures, when used, include interest income on non-accruing loans to the extent that cash payments have been received. Loan fees are included in the computation of interest revenue.
Assets
Credit entities
In euro
In other currencies
Lending
In euro(5)
Government and other agencies
Commercial loans(2)
Secured loans(3)
Others(4)
In other currencies(6)
Secured loans
Others
Securities portfolio
Fixed income securities
Equity securities
Holdings of companies carried by the equity method
Other holdings
Other financial income
Non-earning assets
Total average assets
Total euro assets/ total assets
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Liabilities
Customer funds
Customer deposits
In euro(2)
Current accounts
Savings accounts
Time accounts
In other currencies(3)
Debt securities and other marketable securities
Other financial costs
Non-interest-bearing liabilities
Shareholders’ funds
Other funds without cost
Total average liabilities
Total euro liabilities/total liabilities
31
Changes in Net Interest Income-Volume and Rate Analysis
The following table allocates changes in our net interest income between changes in volume and changes in rate for 2004 compared to 2003, and 2003 compared to 2002. Volume and rate variance have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. The only out-of-period items and adjustments excluded from the following table are interest payments on loans which are made in a period other than the period during which they are due. Loan fees were included in the computation of interest income.
Increase (Decrease) Due to
changes in
(in millions of euro)
Interest income
Government and other Agencies
Commercial Loans
Secured Loans
Other
Holdings in companies carried by the equity method
Other assets
Total assets
Interest expense
Other liabilities
Total liabilities
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Interest Earning Assets—Margin and Spread
The following table analyzes the levels of our average earning assets and illustrates the comparative gross and net yields and spread obtained for each of the years indicated.
(in millions of euro, except percentages)
Average earning assets
Gross yield(1)
Net yield(2)
Net interest margin(3)
Average effective rate paid on all interest-bearing liabilities
Spread(4)
ASSETS
Interest-Bearing Deposits in Other Banks
As of December 31, 2004, interbank deposits represented 4.96% of our assets. Of such interbank deposits, 66.61% were held outside of Spain and 33.39% in Spain. We believe that our deposits are generally placed with highly rated banks and have a lower risk than many loans we could make in Spain. Such deposits, however, are subject to the risk that the deposit banks may fail or the banking system of certain of the countries in which a portion of our deposits are made may face liquidity or other problems.
Securities Portfolio
As of December 31, 2004, our securities (not including investments in affiliates but including equity investments in our industrial portfolio) were carried on our Consolidated Balance Sheet at a book value of €77.22 billion, representing 24.82% of our assets. €18.4 billion or 23.79% of our securities consisted of Spanish Treasury bonds and Treasury bills. The average yield during 2004 on Treasury bonds and bills that BBVA held was 2.04%, compared to an average yield of approximately 4.8% earned on loans and leases during 2004. The market or appraised value of our total securities portfolio as of December 31, 2004 was €77.84 billion. See Notes 6, 9 and 10 to the Consolidated Financial Statements. For a discussion of our investments in affiliates, see Notes 11 and 12 to the Consolidated Financial Statements. For a discussion of the manner in which we value our securities, see Notes 3.d. and 3.e. to the Consolidated Financial Statements.
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The following table analyzes the book value and market value of our ownership of government debt securities, fixed income securities and equity securities. Investments in affiliated companies consolidated under the equity method are not included in the table below.
Government debt securities
Trading portfolio:
Spanish government securities
Securities of, or guaranteed by, the Spanish government
Available-for-sale portfolio:
Bank of Spain certificates of deposit
Spanish Treasury bills
Other fixed interest securities:
Held to maturity securities
Total government securities
Debentures and other debt securities
Other fixed income securities
Other fixed income securities listed in Spain
U.S. Treasury securities
Securities of other U.S. government agencies and corporations
Securities of other foreign governments
Other fixed interest securities listed outside of Spain
Other fixed interest securities not listed
Held to maturity portfolio
Total debentures and other debt securities
Trading securities:
Investment securities:
Equity listed
Equity unlisted
Total equity securities
Total securities portfolio
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The following table analyzes the maturities of our investment and fixed income securities excluding trading portfolio by type and geographical area as of December 31, 2004.
Domestic:
Other Spanish government securities
Held-to-maturity portfolio
Total government debt
Available-for-sale portfolio
Other securities
Foreign:
United States:
U.S. Treasury securities and other U.S. Government agencies
States and political subdivisions
Total United States
Other:
Governments
Total other
Total available –for-sale portfolio
United States
Total held to maturity portfolio
Loan Portfolio
As of December 31, 2004, our total loans and leases amounted to €174.6 billion, or 56.13% of total assets. During 2004, our loans in Spain increased by 14.90% compared to 2003. Our foreign loans increased by 10.90%, compared to 2003, as a result of the growth in lending in the Latin American countries where we operate. In local currency terms growth in loans were of 19.3% in Chile, 13.9% in Peru, 26.7% in Colombia and 15.8% in Mexico. Net of our loan loss reserve, loans and leases amounted to €170.2 billion. For a discussion of certain mandatory ratios relating to our loan portfolio, see “—Supervision and Regulation—Liquidity Ratio” and “—Investment Ratio”.
Loans by Geographic Area
The following table analyzes, by domicile of the customer, our net loans and leases for each of the years indicated.
Domestic
Western Europe
Central and South America
Total foreign
Total net lending
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Loans by Type of Customer
The following table analyzes by domicile and type of customer our net loans and leases for each of the years indicated. The analyses by type of customer are based principally on the requirements of the regulatory authorities in each country.
Government
Agriculture
Industrial
Real estate and construction
Commercial and financial
Loans to individuals
Lease financing
Total domestic
Total loans and leases
Foreign
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The following table sets forth a breakdown, by currency, of our net loan portfolio for each of the past five years.
Total
As of December 31, 2004, loans by BBVA and its subsidiaries to companies we are required to account for by the equity method (for listed companies, if we own over 3% of their voting equity securities, and for non-listed companies, over 20%) amounted to €3.3 billion. Loans outstanding to the Spanish government and its agencies amounted to €15.5 billion, or 8.9% of our total loans and leases as of December 31, 2004, compared to €13.4 billion, or 8.7% of our total loans and leases as of December 31, 2003. None of our loans to companies controlled by the Spanish government are guaranteed by the government and, accordingly, we apply normal credit criteria in extending credit to such entities. Moreover, we carefully monitor such loans because governmental policies necessarily affect such borrowers.
Diversification in our loan portfolio is our principal means of reducing the risk of loan losses. We also carefully monitor our loans to borrowers in sectors or countries experiencing liquidity problems. Our exposure to our five largest borrowers as of December 31, 2004, excluding government-related loans, amounted to €6.9 billion, or approximately 4% of our total outstanding loans and leases.
Maturity and Interest Sensitivity
The following table sets forth an analysis by maturity of our total loans and leases by domicile of the office that issued the loan and type of customer as of December 31, 2004. The determination of maturities is based on contract terms.
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The following table sets forth a breakdown of our fixed and variable rate loans which had a maturity of one year or more as of December 31, 2004.
Interest Sensitivity of
Outstanding Loans and LeasesMaturing in More Than OneYear
Fixed rate
Variable rate
Loan Loss Reserve
Our loan loss reserve is intended to cover losses in connection with substandard loans (including risks and other losses relating to certain performing loans and operations). The loan loss reserve is based on our estimates which we make in accordance with Bank of Spain requirements. Our actual losses relating to loans we have issued may vary from our estimates, which are reviewed on a periodic basis. As changes become necessary, we adjust the level of the loan loss reserve, and appropriate provisions are taken in the period in which the necessity to make such adjustment becomes known. We do not expect to use all specific reserves to cover losses on loans with respect to which such reserves have been established. For both Spanish and foreign borrowers, we estimate the loan loss reserve based on an individual analysis of the quality of the exposure to principal borrowers and debtors and on a statistical basis for remaining lending risks. Country risk, as described under “—Foreign Country Outstandings”, is based on an individual country’s degree of difficulty in servicing its debts, which we estimate based on Bank of Spain guidelines. In accordance with current Bank of Spain regulations, the reserve for doubtful guarantees, acceptances and letters of credit is recorded under “—Other Liabilities—Other accounts”. See Notes 3.c. and 8 to the Consolidated Financial Statements.
Bank of Spain regulations applicable to Spanish banks require that loans on which any payment of principal or interest is 90 days past due must be classified as substandard to the extent described herein (“non-performing substandard loans”) and, so long as they are reflected on the balance sheet, must, except as described in the next paragraph regarding non-performing substandard loans which are fully-secured mortgage loans, be reserved as set forth in the following table. Until the amount of principal and interest past due on a non-performing substandard loan is more than 25% of the outstanding balance of the loan or a payment of principal or interest on such loan is at least six months overdue for consumer loans or 12 months for other loans, the reserve set forth in both of the tables set forth below is a percentage of past due payments of principal and interest to the extent accrued at the time that the loan becomes substandard and with respect to such loans, only such payments and not the entire loan (as in the case of a U.S. bank holding company) are treated as substandard in accordance with Bank of Spain regulations. When the amount of principal and interest past due on a non-performing substandard loan is greater than 25% of the outstanding balance of the loan, or when any payment on such loan is 6 or 12 months overdue (depending on the type of loan), the reserve indicated in both of the tables set forth below is a percentage of the entire amount of the outstanding balance of the loan, and, in accordance with Bank of Spain regulations, the entire principal amount of the loan becomes substandard and is so treated for the purposes of disclosure in this Annual Report.
Period overdue
3-6 months
6-12 months
12-18 months
18-21 months
More than 21 months
Non-performing substandard loans (including leasing agreements) that are considered fully-secured mortgage loans, however, are reserved according to the table set forth below. To be classified as a “fully-secured mortgage loan”, a loan must meet three criteria. First, it must be secured by a mortgage on residential, commercial or mixed-use property or properties or certain rural property or properties. Second, the mortgage must have been placed on the property at the time the loan was originated. Third, total risk exposure must not be greater than 80% of the appraised value of the property (using the original appraised value, if the borrower cannot provide a more current value).
Compliance with these conditions is determined as of the time the loan first becomes a non-performing substandard loan.
3-4 years
4-5 years
5-6 years
More than 6 years
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The foregoing requirements apply to reserves with respect to a single loan to a borrower. In some cases, reserves may be required for all loans to a borrower. If the amount of principal and interest past due on non-performing substandard loans to a borrower, whether regarding fully-secured mortgage loans or otherwise, exceeds 25% of the outstanding balance of all of a Spanish bank’s loans to such borrower, then all of the bank’s loans to such borrower, even if otherwise performing, must be declared substandard, and, except in the case of any loan on which no payment of principal or interest is overdue, reserved for as set forth in the preceding two tables. Once a non-performing loan has been declared substandard, application of Bank of Spain requirements generally results in a higher reserve with respect to such loan than would be required by our estimates, which are made independently of such requirements.
If a bank, for reasons relating to the financial condition of the borrower, has a reasonable doubt that a loan will be collected (or if a loan is as described in the third sentence of this paragraph), such loan (an “other substandard loan”) must be classified as substandard, even if payments are past due for less than 90 days or the loan is otherwise performing. We are required to take a provision regarding other substandard loans equal to the percentage of the loan as to which, in our estimate, there is a reasonable doubt as to collectibility, which amount must be at least 10% of the outstanding balance of the loan. If the loan is to a borrower who is experiencing negative net worth, continuing losses, suspension of payments or a general delay in payments, the minimum reserve is 25% of the outstanding balance of the loan.
None of the foregoing Bank of Spain requirements as to reserves applies to any loan, even if classified as substandard, to the extent that such loan is:
In accordance with Bank of Spain regulations, an additional general purpose reserve, representing 1% of the sum of loans, discounts, fixed-income securities (except trading securities), contingent liabilities and certain doubtful assets (other than substandard loans exempted from provisioning as described in the foregoing paragraph), is set aside to cover risks which are not specifically identified but which may arise in the future. This general purpose reserve is limited to 0.5% for fully-secured mortgage loans.
A regulatory change by the Bank of Spain that entered into effect on July 1, 2000 requires the establishment of a supplementary general allowance for credit losses based either on a bank’s internal models of risk coefficients or, as in the case of BBVA, on risk coefficients set by the Bank of Spain which range from 0% to 1.5%. Provisions to this supplemental allowance are made quarterly and the allowance may not exceed three times risk weighted assets. The amount we contributed to such provision in 2004 was €477 million (€328 million and €232 million in 2003 and 2002, respectively).
Spanish banks, consistent with Bank of Spain guidelines, generally charge off immediately only those loans which they believe will not be repaid at any time or which are outstanding to countries that are considered “bankrupt” under Bank of Spain guidelines. Under those guidelines, a provision for the full amount of such a substandard loan must be made within 18 months after such classification, or six years in the case of fully-secured mortgage loans. Substandard loans may be held on the bank’s balance sheets up to a maximum of three years, or six years in the case of fully-secured mortgage loans, after such classification.
Allowance for Credit Losses
Pursuant to Bank of Spain regulations, once any portion of a loan is classified as non-performing, a specific loan loss allowance is required to be established, with scheduled increases to the allowance based on a calendar of the time elapsed since the first event of
39
nonpayment or for which collection is considered to be doubtful. Based on management’s assessment, banks may elect to record allowances in excess of this minimum requirement. The allowance for credit losses represents management’s estimate of probable losses based upon the following factors:
The following table provides information, by domicile of customer, regarding our loan loss reserve and movements of loan charge-offs and recoveries for the periods indicated.
Loan loss reserve at beginning of period:
Merger with Argentaria:
Acquisition and disposition of subsidiaries
of which due to Bancomer(*)
Total loan loss reserve at beginning of period
Loans written off:
of which due to FOBAPROA(**)
Total loans written off
Recoveries of loans previously written off:
Total recoveries of loans previously written off
Net loans written off
Provision for possible loan losses:
Effect of foreign currency translation
Total provision for possible loan losses
Loan loss reserve at end of period:
Total loan loss reserve at end of period
Purchase of Bancomer; FOBAPROA Adjustments
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Bancomer Purchase
As a result of BBVA’s acquisition of a significant interest in Bancomer in July, 2000, Bancomer was consolidated in BBVA’s 2000 Consolidated Financial Statements. Of the €5,396 million in loan loss reserve reflected in the foregoing table as arising from the Bancomer acquisition, €5,251 million was the amount that had been included by Bancomer on its consolidated balance sheets under the Allowance for Loan Losses caption as of June 30, 2000. Following the Bancomer acquisition, the allowance for loan losses recorded by Bancomer was not adjusted under Spanish GAAP and when included in BBVA’s Consolidated Financial Statements, this balance was combined with BBVA’s existing allowance for loan losses in the same manner as all of Bancomer’s other balance sheet line items were combined with those of BBVA.
FOBAPROA adjustments
The foregoing table indicates that a €3,259 million charge off of loans in 2002 related to FOBAPROA promissory notes. Of this balance, €2,690 million related to a reduction to the provision for possible loan losses and the remaining €569 million related to other items which increased the provision for possible loan losses. As explained in Note 9 to the Consolidated Financial Statements, BBVA’s ownership of the FOBAPROA promissory notes, which were held by Bancomer, arose in connection with measures taken by the Mexican Government during the Mexican economic crisis in 1994 and 1995. Under these measures, Mexican banks, including Bancomer, were allowed to transfer to the Mexican government the right to collect on a portion of their loan portfolio that was experiencing payment difficulties. In exchange, the Mexican government issued to such banks FOBAPROA promissory notes, guaranteed in part by the Mexican government, in an amount equal to the book value (net of provisions) of the loans transferred. The banks, however, remained responsible for 25% of the losses arising from the difference between the amount of the FOBAPROA promissory notes at the time exchanged, plus the accumulated accrued interest on such promissory notes, and the amount the Mexican government was able to recover on the loans transferred to it.
Since the Mexican government only guaranteed up to 75% of the FOBAPROA promissory notes, in 2001 BBVA concluded that the amount not guaranteed by the Mexican government was not collectible. Under Spanish GAAP, this 25% was considered a loss and was written off, with a reduction of assets and of the Allowance for Loan Losses on BBVA’s Consolidated Balance Sheets.
The following table provides information, by domicile of customer, regarding our loan loss reserve and movements of loan charge-offs and recoveries for periods indicated.
(in millions of euro, except
percentages)
Loans charged off:
Real estate and loans to individuals
Total loans charged off
Recoveries of loans previously charged off:
Total recoveries of loans previously charged off
Net loans charged off
Reserve as a percentage of total loans and leases at end of period
Net loan charge-offs as a percentage of total loans and leases at end of period
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Our loan loss reserves as a percentage of total loans and leases declined from 3.09% as of December 31, 2003, to 2.58% as of December 31, 2004, principally due to the significant negative effect of foreign currency translation which resulted in a decrease of €111 million in the value of our loan loss reserves as of December 31, 2004. This decrease was primarily caused by the devaluation of currencies in Mexico, Venezuela, Colombia and Peru, which caused the loan loss reserves of our subsidiaries in these countries to decline significantly when converted to euro in our Consolidated Financial Statements.
We do not maintain records allocating the amount of charge-offs and the amount of recoveries by loan category. See “—Substandard Loans” for information as to the breakdown as of December 31, 2004 by loan category of substandard loans. Also, at the time that a loan is charged off in accordance with Bank of Spain guidelines, it will normally be substantially or fully reserved and, accordingly, such charge-off would have a very limited effect on our net attributable profit or shareholders’ equity. Accordingly, we believe that information relating to domestic reserves and charge-offs by loan category is of less relevance than would be the case for a U.S. bank.
Substandard Loans
We classify loans as substandard according to the regulations of the Bank of Spain (see “—Assets—Loan Loss Reserve”), and not in the manner required by the SEC. In addition, consistent with Bank of Spain regulations, all loans that are 90 days past due, even if well-collateralized and in the process of being collected, are automatically considered non-accrual if they are classified as substandard. As of December 31, 2004, all country risk loans, which are loans that are required to be classified as substandard, even if paying, due to Bank of Spain regulations corresponding to the country of origin of the loans, included in the following table were non-accruing.
Interest on all of our substandard non-accrual loans is not credited to income until actually collected. The amount of gross interest income that would have been recorded regarding our substandard loans as of December 31, 2002, 2003 and 2004 was €869.0 million, €766.8 million and €571.1 million, respectively. The approximate amount of interest income on our substandard loans which was included in net attributable profit as of December 31, 2002, 2003 and 2004 was €127.0 million, €357.4 million and €302.7 million, respectively.
Substandard loans:
Non-performing loans
Public sector
Other resident sectors
Non-resident sector
Country risk
Other non-performing loans
Resident sector
Total substandard loans
Credit loan loss reserve
Other loan loss reserve—Fixed income portfolio
Total loan loss reserve
Substandard loans net of reserves
Non-performing loans as a percentage of total loans and leases
Non performing loans (net of reserves) as a percentage of total loans
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Non-performing loans (net of reserves) as a percentage of total loans
Our total substandard loans amounted to €2,109 million as of December 31, 2004, compared to €3,126 million as of December 31, 2003, principally due to the higher level of substandard loans recorded in 2003 primarily as a result of a decline in the Bank of Spain’s country risk classification of Argentina, which under Spanish GAAP required us to record a higher percentage of Argentine loans as non-performing regardless of the actual payment history of such loans. As a result of the decrease in loan loss reserves described above under “—Loan Loss Reserve” and the larger decrease in total substandard loans described above, our non performing loans as a percentage of total loans decreased from 1.74% to 1.04% and our loan loss reserves as a percentage of substandard loans increased from 151.5% to 213.66%, in each case as of December 31, 2003 and December 31, 2004, respectively.
We experience higher substandard loans in our Latin American operations, as a percentage of total loans, than in our Spanish operations and actively monitor the higher risk profile of the loan portfolios of our Latin American operations.
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As of December 31, 2004, we do not believe that there is a material amount of loans not included in the foregoing table where known information about possible credit problems of the borrowers gives rise to serious doubts as to the ability of the borrowers to comply with the currently applicable loan repayment terms.
The following table provides information, by domicile and type of customer, regarding our substandard loans and the loan loss reserves taken for each substandard loan category, as of December 31, 2004.
Agricultural
General reserve
Foreign Country Outstandings
The following table sets forth, as of the end of the years indicated, the aggregate amounts of our cross-border outstandings (which consist of loans, interest-bearing deposits with other banks, acceptances and other monetary assets denominated in a currency other than the home-country currency of the office where the item is booked) where outstandings in the borrower’s country exceeded 0.75% of our total assets. Cross-border outstandings do not include loans in local currency made by our subsidiary banks to customers in other countries to the extent that such loans are funded in the local currency or hedged. As a result, they do not include the vast majority of the loans made by our Latin American subsidiaries.
O.E.C.D.
United Kingdom
Other O.E.C.D.
Total O.E.C.D.
The following table sets forth the amounts of our cross-border outstandings as of December 31 of each year indicated by type of borrower where outstandings in the borrower’s country exceeded 0.75% of our total assets.
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The Bank of Spain requires that minimum reserves be maintained for cross-border risk arising with respect to loans and other outstandings to countries, or residents of countries, falling into certain categories established by the Bank of Spain on the basis of the level of perceived transfer risk. The category that a country falls into is determined by us, subject to review by the Bank of Spain.
The following table shows the minimum required reserves with respect to each category of country. For BBVA’s level of coverage as of December 31, 2004, see Note 8 to the Consolidated Financial Statements.
Categories(1)
Countries belonging to the OECD whose currencies are quoted in the Spanish foreign exchange market
Countries with transitory difficulties(2)
Doubtful countries(2)
Very doubtful countries(2)(3)
Bankrupt countries(4)
Our exposure to borrowers in countries with difficulties (the last 4 categories in the foregoing table), excluding our exposure to subsidiaries or companies we manage and trade-related debt, amounted to €1,047 million, €927 million and €378 million as of December 31, 2002, 2003 and 2004, respectively. These figures do not reflect loan loss reserves of 46.1%, 66.2% and 30.0%, respectively, against the relevant amounts outstanding at such dates. Deposits with or loans to borrowers in all such countries as of December 31, 2004 did not in the aggregate exceed 0.12% of our total assets.
The country-risk exposures described in the preceding paragraph as of December 31, 2004, 2003 and 2002 do not include exposures for which insurance policies have been taken out with third parties that include coverage of the risk of confiscation, expropriation, nationalization, nontransfer, nonconvertibility and, if appropriate, war and political violence. The sums insured as of December 31, 2004, 2003 and 2002, amounted to $153 million and $466 million and $584.5 million, respectively (approximately €113 million, €369 million and €557.3 million, respectively based on a euro/dollar exchange rate on December 31, 2004 of $1.00=€0.73, December 31, 2003 of $1.00 = €0.79 and on December 31, 2002 of $1.00 = €0.95).
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LIABILITIES
The principal components of our customer deposits are domestic demand and savings deposits and foreign time deposits. The following tables provide information regarding our deposits by principal geographic area for the dates indicated.
CreditInstitutions
Latin America
For an analysis of our deposits, including non-interest bearing demand deposits, interest-bearing demand deposits, saving deposits and time deposits, see Notes 17 and 18 to the Consolidated Financial Statements.
As of December 31, 2004, the maturity of our time deposits (excluding interbank deposits) in denominations of $100,000 (approximately €73,416 as of December 31, 2004) or greater was as follows:
3 months or Under
Over 3 to 6 months
Over 6 to 12 months
Over 12 months
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Time deposits from Spanish and foreign financial institutions amounted to €5.5 billion and €24.7 billion, respectively, as of December 31, 2004, substantially all of which were in excess of $100,000 (approximately €73,416 as of December 31, 2004).
Large denomination deposits may be a less stable source of funds than demand and savings deposits because they are more sensitive to variations in interest rates. For a breakdown by currency of deposits as of December 31, 2004 and 2003, see Note 18 to the Consolidated Financial Statements.
Short-term Borrowings
Securities sold under agreements to repurchase and promissory notes issued by us constituted the only categories of short-term borrowings that equaled or exceeded 30% of stockholders’ equity at December 31, 2002, 2003 and 2004.
Securities sold under agreements to repurchase (principally Spanish Treasury bills):
At December 31
Average during year
Maximum quarter-end balance
Other short-term borrowings (principally bank promissory notes):
Total short-term borrowings at December 31
Bonds, debentures outstanding and subordinated debt
Bank promissory notes:
Additionally, as of December 31, 2004, the “short-term borrowings” caption included mortgage bonds amounting to €6,751 million.
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Return on Equity
The following table sets out our return on equity ratios:
ROE (net attributable profit/average equity)
ROA (income before minority interests/average total assets)
RORWA (income before minority interests/risk weighted assets)
Dividend pay-out ratio
Equity to assets ratio
F. Competition
The commercial banking sector in Spain has undergone significant consolidation. In addition to the merger of Banco de Santander, S.A. and Banco Central Hispano S.A. that formed Santander Central Hispano, S.A., BBV and Argentaria merged in October 1999. In the majority of the markets where we provide financial services, Santander Central Hispano is our strongest competitor.
We face strong competition in all of our principal areas of operation. The deregulation of interest rates on deposits in the past decade has led to increased competition for large demand deposits in Spain and the widespread promotion of interest-bearing demand deposit accounts and mutual funds. The capturing of customer funds in Spain had been characterized for several years by a large shift of deposits into mutual funds. In 2002, the performance of capital markets reversed this trend and our mutual fund assets under management decreased during such period. In 2003, however, mutual fund deposits once again began to increase and grew by 16% over 2002. Moreover, in 2004 changes in the tax treatment of savings products encouraged competition from the investment fund and the pension fund industries. In 2004, mutual fund assets under management grew by 10.9%. During the same period, the trend in deposits has been favorable and deposits in the banking sector increased by 8.5%, 10.2% and 14.1%, in 2002, 2003 and 2004, respectively.
Spanish savings banks and money market mutual funds provide strong competition for savings deposits, which form an important part of our deposit base, and, in the case of savings banks, for other retail banking services. Credit cooperatives, which are active principally in rural areas, where they provide savings bank and loan services and related services such as the financing of agricultural machinery and supplies, are also a source of competition.
The entry of on-line banks into the Spanish banking system has increased competition, mainly in customer funds businesses such as deposits and especially in saving and time deposits. Insurance companies and other financial services firms also compete for customer funds. Like the commercial banks, savings banks, insurance companies and other financial services firms are expanding the services offered to consumers in Spain. The volume of mortgage loans in the majority of countries where we operate experienced strong growth in 2004. We face competition in this area from saving banks and, to a lesser extent, cooperatives.
The EU Directive on Investment Services took effect on December 31, 1995. The EU Directive permits all brokerage houses authorized to operate in other member states of the EU to carry out investment services in Spain. Although the EU Directive is not specifically addressed to banks, it affects the activities of banks operating in Spain.
Foreign banks also have a strong presence in Spain. As of December 31, 2004, approximately 83 foreign banks, of which 25 were subsidiaries and 58 were branches, operated in Spain and several foreign banks have acquired small and medium-sized Spanish banks.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Overview
In 2004, the world economy generally experienced moderate growth, continuing the positive trend begun in 2003, with China and the United States acting as the major driving forces behind economic growth and high oil prices representing the major uncertainty. While Latin American economies experienced strong growth, European Union economies generally grew modestly, but the Spanish economy was an exception and experienced growth of 2.5%. As a result of stronger growth in the United States, the U.S. Boards of Governors of the Federal Reserve System continued to increase interest rates. The European Central Bank did not increase its reference interest rate and short-term market interest rates in the euro zone remained stable, but long-term interest rates declined. By contrast, short-term interest rates in Mexico, where our most significant operations outside of Spain are located, began to rise in the second quarter of 2005 and continued to increase throughout the year.
Critical Accounting Policies
Note 2 to the Consolidated Financial Statements explains that the Consolidated Financial Statements are presented in the format required by Bank of Spain rules and were prepared in accordance with generally accepted accounting principles for banks in Spain, which include the accounting requirements established by the Bank of Spain (“Spanish GAAP”). The presentation format used and Spanish GAAP accounting principles applied vary in certain respects from the presentation format and accounting rules required to be applied under generally accepted accounting principles in the United States (“U.S. GAAP”) and other rules that are applicable to U.S. banks. A description of the most significant valuation and income recognition principles under Spanish and U.S. GAAP applicable to the Consolidated Financial Statements of BBVA is set forth in Note 32.2.A.
Note 3 to the Consolidated Financial Statements contains a summary of our significant accounting policies. We consider certain of these policies to be particularly important due to their effect on the financial reporting of our financial condition and because they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Our reported financial condition and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the Consolidated Financial Statements. The nature of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our Consolidated Financial Statements and the discussion below. We have identified the following accounting policies as critical to the understanding of our results of operations, since the application of these policies requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.
Derivatives and other futures transactions
These instruments include unmatured foreign currency purchase and sale transactions, unmatured securities purchase and sale transactions, futures transactions relating to securities, exchange rates or interest rates, forward interest rate agreements, options relating to exchange rates, securities or interest rates and various types of financial swaps.
Macro hedges
These transactions are carried out for hedging and overall management of the financial risks to which we are exposed and aimed at eliminating or significantly reducing currency, interest rate or price risks on our asset and liability positions. Similarly, we also treat as hedging transactions certain transactions which, although not specifically assigned to a specific hedged item, form part of global hedges or macro hedges used to reduce the risk to which we are exposed as a consequence of the overall management of our assets, liabilities and other transactions. For this reason, the gains or losses arising from these hedging transactions are recorded symmetrically with the revenues and expenses relating to the hedged items, and the collections or payments made in settlement of such hedging transactions are recorded with a balancing item under the “Other Liabilities” and “Other Assets” captions in the Consolidated Financial Statements.
As of December 31, 2004, 2003 and 2002, we had arranged macro hedges transactions to cover share price risk in connection with our investments in securities listed on principal international markets and to cover interest rate risk in connection with long-term customer deposits. The security price macro hedges were valued at a quoted market price or based on other valuation techniques. The settlements relating to the interest rate macro hedge were recorded under the accrual method. Our hedging transactions are subjected to an integrated system of risk and earnings measurement, which enables us to continually monitor and assess the financial performance of such transactions. As part of this risk monitoring system, for each macro hedge, we record provisions for credit, market and operating risk in accordance with the provisioning policies in our banking business for similar transactions. In connection with our macro hedging policy, we make assumptions as to future movements in interest rates and exchange rates.
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Non-hedging transactions valuation
Non-hedging transactions, which are also known as trading transactions, are valued in accordance with Bank of Spain regulations based on the market on which they are traded:
Although Bank of Spain’s rules provide guidance regarding valuation of OTC derivative financial instruments, we are required to make estimates and assumptions regarding theoretical closing prices, such as with respect to futures quotations, maturities and the effects of markets risks.
The determination of theoretical closing prices mentioned above requires us to make estimates and certain assumptions. If listed market prices are not available, we have to calculate the fair value from commonly used pricing models that consider contractual prices for the underlying financial instruments, yield curves and other relevant factors. Our use of different estimates or assumptions in these pricing models could lead to different amounts being recorded in our Consolidated Financial Statements.
Provision for the statistical coverage of credit losses
In December 1999, the Bank of Spain introduced a new solvency provision, the so-called statistical or dynamic provision, focusing on the statistical risk embedded in a bank’s unimpaired loan portfolio. This provision went into effect in July 2000. The main idea behind this provision is to try to capture expected losses, which, during the pendency of loans, are known in a statistical sense but are not yet quantifiable or attributable to specific borrowers. Since the loss risk appears at the beginning of the loan, so does the statistical provision requirement.
The amount of the statistical provision is the difference between the measure of latent risk (expected losses) and any specific provisions already taken (covering impaired assets). In a favorable economic climate, specific provisions are low and statistical provisions are positive. However, during an economic slowdown, as the percentage of impaired assets increases, specific provisions also increase and the statistical provisions become negative. This means that the statistical fund (accumulated in previous years) starts being used and an amount equal to the difference between the latent risk and the specific provisions is credited to the Net Loan Loss Provisions line item of the Consolidated Statement of Income.
The Bank of Spain solvency provision offers banks two options for establishing loan loss provisions. First, banks may use their own internal measurements of statistical credit risk and second, banks may use a standard method with parameters set by the Bank of Spain. We use the standard method, dividing our transactions into six groups, according to the relative risk of our assets and off-balance sheet items. A vector of coefficients (ranging from 0 to 1.5%) determined by the Bank of Spain is applied to the loans and off-balance sheet items in each of the six groups. The resulting figure is the estimated expected loss in connection with our assets and off-balance sheet items.
We are currently working on developing our own internal method for calculating statistical credit risk, which is intended to be consistent with the principles contained in the Basel II accords.
Goodwill in consolidation
This line item in our Consolidated Statement of Income reflects the positive differences between the acquisition cost of shares of consolidated companies or companies carried by the equity method and their underlying book value, if such differences cannot be identified as corresponding to additions to the book value by specific assets of the acquired companies.
We generally amortize goodwill on a straight-line basis over a maximum period of 20 years based on our assumption that this is the period over which the underlying investments will produce income for us. If we determine that goodwill will not generate income as expected, we may be required to adjust the amortization period accordingly.
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Unrealized losses in investment securities
At the end of every year, we assess our investment securities to determine whether a decline in their fair value has resulted in unrealized gains or losses. If unrealized losses are characterized as “other than temporary”, such losses would be required to be taken as a charge to our Consolidated Statement of Income. In order to assess whether unrealized gains or losses exist, we must first identify whether there has been a change in the securities’ fair value by applying specific valuation methodologies under Spanish GAAP depending on whether the security is debt or equity and part of our trading portfolio, held-to-maturity portfolio or available-for-sale portfolio.
Determinations of fair value for listed securities are generally based on market prices and for unlisted securities on discounted cash flows (for debt) and book value (for equity). A change in fair value that results in a fair value that is lower than amortized cost will generally give rise to an unrealized loss.
Once an unrealized loss has been identified, it must then be classified as “temporary” or “other than temporary”. Under Spanish GAAP there are no general rules regarding the methodologies and factors that must be used or the period of time to consider in determining whether an unrealized loss is “temporary” or “other than temporary”. BBVA’s management considers that an unrealized loss is “temporary” under Spanish GAAP if it believes that it will collect or recover all of the unrealized loss due to the credit risk of the issuer of the investment security or when due to current or expected market conditions (volatility, interest rate evolution or macroeconomic variables) or future expectations, management considers that all or part of an unrealized loss will be recovered. BBVA’s management considers that an unrealized loss is “other than temporary” if it believes that it will not collect or recover all the unrealized loss due to the credit risk of the issuer of the investment security, or when due to market conditions (volatility, interest rate evolution, macroeconomic variables) or future expectations, management considers that all or part of an unrealized loss will not be recovered (market risk). Based on the foregoing factors, BBVA’s management will conclude that an unrealized loss is “other than temporary” when a demonstrable recovery in the fair value of the security is not expected in the near future (one year). BBVA’s management performs this analysis at the end of each reporting period.
As described above, if an unrealized loss is classified as “other-than-temporary” we are required by Bank of Spain regulations to take a charge to our Consolidated Statement of Income and we record such charge under the “net securities write downs” and “market operations” line items.
Our total unrealized losses were €136.5 million, €60.3 million and €551.9 million as of December 31, 2004, 2003 and 2002, respectively.
The charges to our Consolidated Statement of Income as of December 31, 2004 were €48.5 million. Charges to our Consolidated Statement of Income as of December 31, 2002 were €282 million. There were no charges to Consolidated Statement of Income as of December 31, 2003.
If management’s assumptions and estimates concerning the probability that we will recover all or part of unrealized losses are considered incorrect and are revised, or if such assumptions and estimates are modified in light of changes in the factors described above, we may be required to change the classification of certain unrealized losses from “temporary” to “other than temporary” and, accordingly, take a corresponding charge to our Consolidated Statement of Income.
International Financial Reporting Standards (IFRS)
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A. Operating Results
Events Affecting Comparability of Historical Results of Operations and Financial Condition
Charges for Early Retirements
In 2002, 2003 and 2004, we offered certain employees the option to retire prior to the retirement age stipulated in such employees’ current collective labor agreement. The costs arising from such early retirements include indemnities, deferred compensation and future contributions to external pension funds. In 2002 and 2003, as authorized by the Bank of Spain and approved by our General Shareholders Meeting, we charged €324 million and €520 million, respectively, as the estimated aggregate cost of early retirements to retained earnings. In 2004, the Bank of Spain did not grant us permission to charge the estimated costs of early retirements to retained earnings and, accordingly, we charged €372 million to our consolidated statement of income for the year ended December 31, 2004.
Effect of the Depreciation of Latin American Currencies
We are exposed to foreign exchange rate risk in that our reporting currency is the euro, whereas certain of our subsidiaries keep their accounts in other currencies, principally Mexican pesos, Argentine pesos, Chilean pesos, and Colombian pesos and also Venezuelan bolivars, Peruvian nuevos soles, Paraguyan guaranis, Uruguyan pesos and U.S. dollars.
BBVA’s results of operations and financial condition in 2004, 2003 and 2002 were significantly affected by the declines in exchange rates of many of the Latin American currencies in countries in which BBVA operates against the euro. As Latin American currencies and the U.S. dollar depreciate against the euro, when the results of operations of our Latin American subsidiaries are included in our Consolidated Financial Statements, the euro value of their results declines, even if, in local currency terms, their results of operations and financial condition have remained the same or improved relative to the prior year. Accordingly, declining exchange rates may limit the ability of our results of operations, stated in euro, to fully describe the performance in local currency terms of our Latin American subsidiaries.
The assets and liabilities of our subsidiaries which keep their accounts in currencies other than the euro have been translated to euro at the period-end exchange rates for inclusion in our Consolidated Financial Statements. Income statement items have been translated at the average exchange rates for the period. The following table sets forth the exchange rates of several Latin American currencies against the euro, expressed in local currency=€1.00 at December 31, 2004, 2003 and 2002, according to the European Central Bank.
Mexican peso
Venezuelan bolivar
Colombian peso
Chilean peso
Peruvian nuevo sol
Argentine peso
U.S. dollar
For BBVA, the most significant country that has been adversely affected by declining exchange rates has been Mexico where our most significant operations outside of Spain are located. As indicated in the foregoing table, the Mexican peso/euro exchange rate has fallen sharply over 2002, 2003 and 2004, declining approximately 56% over the three year period. The effect of declining exchange rates in Mexico and in several of the other Latin American countries in which we operate is an important factor that, if this trend were to change and exchange rates improved, could affect the comparability of our historical and future results of operations and financial condition. In addition, declining exchange rates may limit the ability of our results of operations, stated in euro, to fully describe the performance in local currency terms of our Latin American subsidiaries.
Political and economic conditions in Argentina in the last several years have had a significant negative effect on the entire Argentinean banking sector and have consequently severely affected the operating results of our Argentinean banking, and, to a lesser
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extent, pension fund management operations during the period. Though macroeconomic and political conditions improved in Argentina in 2003 and 2004, significant instability remained and the extent and scope of any economic and banking recovery are uncertain.
In 2002, we entered into a series of transactions with Banco Francés and made an additional provision of €131 million in respect of securities issued by Banco Francés and held by us. This amount was charged to our 2002 consolidated statement of income. In 2003, BBVA did not make any additional investments in, or provide any financial assistance to, its subsidiaries in Argentina.
On January 21, 2004, Banco Francés presented to Argentine banking authorities the latest version of its “regularization and reorganization” plan, which Banco Francés had been required to prepare beginning in 2002. The plan proposed the sale by Banco Francés of its subsidiary BBVA Banco Francés (Cayman) Ltd. to us, and the capitalization of a €78 million loan granted by us to Banco Francés.
The sale of BBVA Banco Francés (Cayman) Ltd. to us for U.S.$238.5 was closed on March 18, 2004. On April 22, 2004, Banco Francés’s shareholders. authorized a capital increase with a par value of ARP 385 million, which was executed in October 2004. We subscribed to the capital increase through the conversion into equity of the €78 million loan we had granted Banco Francés.
As a result of the measures described above, we have provisioned for or written off our entire investment in Argentina to date. Despite these provisions and write-offs, if the situation in Argentina deteriorates and adversely affects the results of operations of our Argentine businesses, our financial condition and results of operations could be materially adversely affected.
Sale of BBV Brasil, S.A.
On January 13, 2003, BBVA announced its intention to sell its Brazilian affiliate, Banco Bilbao Vizcaya Argentaria Brasil, S.A. (“BBV Brasil”) to Banco Bradesco, S.A. (“Bradesco”). On June 9, 2003, upon completion of due diligence, receipt of authorizations from regulatory authorities and approval by the corresponding corporate bodies, BBVA transferred 100% of BBV Brasil to Bradesco, in consideration for which Bradesco paid 35,481,460,311 of its newly-issued ordinary shares and 34,948,501,563 of its newly-issued preferred shares, totaling 4.44% of Bradesco’s share capital, as well as 1,864 million Brazilian Reais in cash, for a total consideration of approximately 2,626 million Brazilian Reais (approximately $900 million). During the second half of 2003, BBVA increased its interest in Bradesco to 5.0%.
As a result of our agreement to sell our entire interest in BBV Brasil in January 2003, under Spanish GAAP we accounted for BBV Brasil’s results of operations from January 1, 2003 until June 9, 2003 under the equity method, rather than under full consolidation, which we had applied in 2002. In addition, also consistent with Spanish GAAP, for the remainder of 2003 we accounted for our interest in Bradesco under the equity method. Accordingly, whereas in 2002 each of the line items in our Consolidated Statement of Income reflected the contribution of BBV Brasil, in 2003 and 2004 our Brazilian results of operations and investments are reflected only in the “Net income from companies accounted for by the equity method” line item in our Consolidated Statement of Income.
In addition, in connection with our decision to sell BBV Brasil in January 2003, as of December 31, 2002, we recorded a charge €189 million in the “Net income on Group transactions” line item of our Consolidated Statement of Income.
Other Provisions and Charges
In 2002, we elected to take provisions and extraordinary charges of €129 million of extraordinary goodwill amortization in respect of our investments in subsidiaries located in non-investment grade countries, such as Colombia, Venezuela and Peru. These provisions were based on our assessment of the prospects for economic recovery in these countries, the prolongation of the negative effect on earnings of the depreciation in several Latin American currencies and the overall likelihood of our recovering the full value of our investments. In 2002, we also took €81 million of special provisions for expenses relating the early retirement of certain of our personnel.
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Consolidated Statement of Income
Our Consolidated Statement of Income covering the years ended December 31, 2004, 2003 and 2002 is set out below.
Personnel costs
Other administrative expenses
Amortization of consolidation goodwill
Pre-tax profit
Income before minority interests
Results of operations for 2004 compared with 2003
Net interest income for 2004 amounted to €7,069 million, an increase of 4.9% from €6,741 million in 2003, principally due to an increase in the group’s overall business volume. Low interest rates in Spain during 2004 reduced the spread between the interest we paid on interest-bearing liabilities, principally deposits, and the interest we earned on our interest-earning assets, principally loans, in our core Spanish market. This low yield spread was off-set by the significant increase in business volume in Spain during 2004 and an increase in both interest rates and business volume in Mexico, which resulted in a higher yield spread, and an increase in net interest income generated by the Mexico business unit. In addition, the depreciation against the euro of the currencies of the Latin American countries in which operate adversely affected our subsidiaries net interest income expressed in euro.
The following table summarizes the principal components of net interest income for 2004 compared to 2003.
Financial revenues
Financial expenses
Income from equities portfolios
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Net fee income in 2004 amounted to €3,379 million, an increase of 3.6% from €3,263 million in 2003, principally due to a 6.9% increase of fees from mutual and pensions funds management compared to 2003 due to a 10.1% increase in assets under management. In addition, brokerage fees increased 4.7% in 2004 compared to 2003.
Adding net interest income and net fee income results in a basic margin of €10,448 million in 2004, an increase of 4.4% from €10,004 million in 2003.
Income from market operations totaled €605 million in 2004, a decrease of 7.1% from €652 million in 2003, principally due to a 58.7% decrease in income from market operations in our Wholesale and Investment Banking business unit and a 50.1% decrease in income from market operations in our Mexico business unit, which more than offset a 41% increase in income from market operations of our Assets and Liability Committe.
Adding basic margin and income from market operations results in ordinary revenue of €11,053 million in 2004, an increase of 3.7% from €10,656 million in 2003.
General administrative expenses amounted to €4,963 million in 2004, a decrease of 1.3% from €5,031 million in 2003, principally due to cost containment measures applied throughout BBVA’s operations. During 2004, we reduced our headcount by nearly 2,080 people (2.4%), primarily in Latin America (a reduction of 1,730, or 3.3%), the majority of which occurred in Mexico and Venezuela. Headcount was also reduced as a result of the sale of our pension management and insurance companies in El Salvador.
Depreciation and amortization of property and equipment and intangible assets amounted to €453 million in 2004, a decrease of 11.2% from €511 million in 2003, principally due to the continued depreciation of Latin American currencies against the euro which decreased the euro value of the property and equipment and intangible assets of our Latin American subsidiaries.
Subtracting, among other items, general administrative expenses and depreciation and amortization from ordinary revenue results in net operating income of €5,440 million in 2004, an increase of 11.1% from €4,895 million in 2003.
As described in the following table, in 2004 net income from companies accounted for by the equity method amounted to €360 million, compared to €383 million in 2003.
Income from companies accounted for by the equity method
Dividends received
The increase income from companies accounted for by the equity method in 2004 was principally due to the improvement in the earnings of our investee companies in 2004, while the decrease in net income from companies accounted for by the equity method was due to higher dividends paid by such investee companies in 2004 compared to 2003.
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Amortization of consolidation goodwill charges amounted to €582 million in 2004, a decrease of 9.0% from €639 million in 2003, principally due to the €119 million of extraordinary goodwill charges we recorded in 2003 relating to our investments in Bradesco and Gas Natural. Of the amount recorded in 2004, €243 million related to the amortization of goodwill of Bancomer and €193 million related to Banca Nazionale del Lavoro, €145 million of which corresponded to the early amortization of the unamortized goodwill relating to this entity in the last three months of 2004. In 2004, the amortization period we apply to the goodwill of Bancomer was extended from 10 to 20 years because we determined that it is forseeable that we will recover our investments in Bancomer over such longer period.
Net income on Group transactions amounted to €592 million in 2004, an increase of 7.0% from €553 million in 2003. This increase was principally due to the sale of our interest in Banco Atlántico, which resulted in a gain of €218 million, and from gains from the sale of our interests in Telefónica, S.A. (€142 million), Gamesa Corporativa, S.A. (€53.1 million), Acerinox, S.A. (€34.6 million), Grubarges Inversion Hoteleria, S.L. (€26.3 million), Vidrala, S.A. (€19.3 million) and Hilo Direct Seguros, Reaseguros, S.A. (€26.0 million), which amounted to an aggregate of €258 million.
Net loan loss provisions amounted to €931 million in 2004, a decrease of 27.1% from €1,277 million in 2003. The following table sets forth the changes in the principal items comprising our net loan loss provisions in 2004 and 2003.
Gross provisions
Reversals
Recoveries
The decline in net loan loss provisions in 2004 compared to 2003 was principally due to the depreciation of the Latin America currencies in the countries in which we have operations and increased provisions we took in 2003 related to our operations in Argentina as a result of an increase from 50% to 75% of the country-risk provision requirement relating to loans issued by our Argentine banks due to our decision to adopt more stringent criteria for classification of doubtful loans in Argentina than are required under applicable Bank of Spain guidelines. Also, in 2004 our non-performing loan (“NPL”) ratio improved to 1.04% from 1.74% in 2003 principally due to a 20% decrease in non-performing loans and a 14% increase in the size of our overall loan portfolio. These reductions in loan loss provisions were partially offset by an increase of over €600 million for provisions for the statistical coverage of loan losses as a result of the growth in total net lending in 2004.
Net extraordinary items in 2004 amounted to a loss of €730 million, principally due to an extraordinary charge of €572 million relating to the cost of the early retirement in 2004 of 1,372 employees. As described above, in 2003 and 2002, in accordance with Rule 13.13 of Bank of Spain Circular 4/1991 and with the approval of our shareholders, we charged these provisions to retained earnings.
Extraordinary income amounted to €432 million in 2004, a decrease of 31.5% from €631 million in 2003, and included the following items: €37 million of gains relating to the effect of inflation accounting in certain countries in which we operate, €97 million of gains on the disposal of property and equipment and long-term financial investments, €74 million from the recognition of interest earned in prior years and €224 million in other extraordinary gains principally due to income from the provision of non-banking services, which we are required to record under extraordinary income. See Note 28.g. to the Consolidated Financial Statements.
Extraordinary losses amounted to €1,162 million in 2004, an increase of 58.4% from €734 million in 2003, and included the following items: €572 million relating to early retirement costs, €75 million in losses relating to the effect of inflation accounting in certain countries in which we operate, €21 million in losses on the disposal of property and equipment and long-term financial investments, €12 million in provisions for property received in foreclosures, €74 million in provisions for contingencies, €69 million in provisions related to forward derivative transactions, €309 million in other provisions and €30 million in other extraordinary losses.
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The effective tax rate for 2004 was 23.1% compared to 24% for 2003, principally due to the change in the composition of our pre-tax profit. The corporate tax reserve amounted to €957 million in 2004, an increase of 4.6% from €915 million in 2003.
Minority interests amounted to €390 million in 2004, a decrease of 41.7% from €670 million in 2003, principally due to the decrease of minority interests in Bancomer. In February 2004, we completed a U.S.$4.1 billion tender offer to acquire all of the outstanding shares of Bancomer and increased our interest in Bancomer from approximately 59.4% to more than 99%. Our minority interests also decreased in 2004 as a result of our redemption of three series of our outstanding preferred shares during such year.
As a result of the items described above, our net attributable profit amounted to €2,802 million in 2004, an increase of 25.8% from €2,227 million in 2003.
Financial condition
Our total assets amounted to €311 billion as of December 31, 2004, an increase of 8.3% from €287 billion as of December 31, 2003, principally due to an increase in overall Group lending.
As of December 31, 2004, our customer funds (which include deposits, marketable debt securities, subordinated debt, mutual funds and pension funds) amounted to €324 billion, an increase of 9.5% from €296 billion as of December 31, 2003, principally due to an increase in deposits to our mutual funds and pensions plans and an increase in marketable debt securities.
Stockholders’ equity
As of December 31, 2004, stockholders’ equity amounted to €15.6 billion, an increase of 25.4% from €12.4 billion as of December 31, 2003, principally due to a €2.0 billion capital increase undertaken in February 2004 in connection with our tender offer for all of Bancomer’s outstanding shares.
Results of operations for 2003 compared with 2002
Net interest income for 2003 amounted to €6,741 million, a decrease of 13.7% from €7,808 million in 2002, principally due to the negative effect of converting to euro the net interest income of several of our Latin American subsidiaries from their local currency, which depreciated against the euro in 2003, in our Consolidated Statement of Income. The effect of the depreciation of Latin American currencies on our reported net interest income more than offset modest growth in our core domestic commercial banking business, which experienced significant pressure on yield spreads as a result of extremely low market interest rates in Spain in 2003. The low interest rates reduced the spread between the interest we paid on interest-bearing liabilities, principally deposits, and the interest we earned on our interest-earning assets, principally loans, in our core Spanish market to historically low levels. Our efforts to offset this low yield spread by increasing volumes was only partially successful and overall growth in net interest income in Spain was insufficient to offset the strong depreciations of Latin American currencies described above. In addition, net interest income in 2003 was negatively affected by the sale of BBV Brasil, which contributed €304 million in net interest income in 2002.
The following table summarizes the principal components of net interest income for 2003 compared to 2002.
Net fee income in 2003 amounted to €3,263 million, a decrease of 11.0% from €3,668 million in 2002, principally due to the depreciation of Latin American currencies and market volatility, which depressed our fee income derived from domestic asset management, securities brokerage and trading activities. In addition, net fee income in 2003 was negatively affected by the sale of BBV Brasil, which contributed €58 million in net fee income in 2002.
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Adding net interest income and net fee income results in a basic margin of €10,004 million in 2003, a decrease of 12.8% from €11,476 million in 2002.
Income from market operations totaled €652 million in 2003, a decrease of 14.8% from €765 million in 2002, principally due to adverse market conditions, particularly in the second half of 2003. In addition, income from market operations in 2003 was negatively affected by the sale of BBV Brasil, which contributed €21 million to income from market operations in 2002.
Adding basic margin and income from market operations results in ordinary revenue of €10,656 million in 2003, a decrease of 12.9% from €12,241 million in 2002.
General administrative expenses amounted to €5,031 million in 2003, a decrease of 12.8% from €5,772 million in 2002, principally due to the depreciation of Latin American currencies and to cost containment measures applied throughout BBVA’s operations. During 2003, we reduced our headcount by nearly 6,896 people (7.4%), particularly in Latin America (a reduction of 6,193, or 10.4%, of which 4,610 related to the sale of BBV Brasil in January 2003, and significant personnel cuts were also made in Venezuela and Argentina). Since 2000, when we acquired a significant interest in Bancomer, our total headcount has fallen from 108,082 employees as of December 31, 2000, to 86,197 as of December 31, 2003, a 20.2% reduction, including a net reduction of approximately 2,600 in Spain and 19,000 in Latin America, principally in Mexico, Venezuela, Argentina, Colombia and Brazil.
Depreciation and amortization of property and equipment and intangible assets amounted to €511 million in 2003, a decrease of 19.0% from €631 million in 2002, principally due to depreciation of Latin American currencies against the euro which decreased the euro value of the property and equipment and intangible assets of our Latin American subsidiaries.
Subtracting, among other items, general administrative expenses and depreciation and amortization from ordinary revenue results in net operating income of €4,895 million in 2003, a decrease of 12.2% from €5,577 million in 2002.
As described in the following table, in 2003 net income from companies accounted for by the equity method amounted to €383 million, compared to €33 million in 2002.
Dividend adjustment
The significant increase in net income from companies accounted for by the equity method in 2003 was principally due to a strong improvement in the earnings of our investee companies in 2003 after they experienced sharp declines in operating results in 2002. In addition, as described above, in 2003 we accounted for our interest in BBV Brasil from January 1, 2003 until June 9, 2003 and our interest in Bradesco, following the closing of the BBV Brasil transaction on June 9, 2003, under this line item, whereas in 2002, we had accounted for our interest in BBV Brasil under full consolidation. Our interests in BBV Brasil and Bradesco contributed €34 million and €19 million, respectively, to net income from companies accounted for by the equity method in 2003, compared to zero contribution to this line item in 2002.
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Amortization of consolidation goodwill charges amounted to €639 million in 2003, a decrease of 5.9% from €679 million in 2002, principally due to our decreased interest in Credit Lyonnais and the €129 million of extraordinary goodwill charges we recorded in 2002 relating to investments in our subsidiaries located in non-investment grade countries.
Net income on Group transactions amounted to €553 million in 2003, an increase of 53.2% from €361 million in 2002. This increase was principally due to the sale of our stake in Crédit Lyonnais which resulted in a gain of €342 million.
Net loan loss provisions amounted to €1,277 million in 2003, a decrease of 26.7% from €1,743 million in 2002. The following table sets forth the changes in the principal items comprising our net loan loss provisions in 2003 and 2002.
The decline in net loan loss provisions in 2003 was principally due to the effect of the depreciation of Latin American currencies which required us to take lower loan loss provisions as the euro value of loans made by our Latin American subsidiaries declined. The decrease in net loan loss provisions caused by depreciating currencies more than offset an increase in the percentage of loans in Latin America for which we took provisions in 2003 as a result of adopting more stringent criteria for classification of doubtful loans than are required under applicable Bank of Spain guidelines. These criteria were adopted as a result of regulatory developments in certain countries in which we operate and our effort to apply loan classification criteria on a uniform basis throughout our operations. Our non-performing loan (“NPL”) ratio in 2003 was 1.74%, which was a return to historical levels (1.71% in 2001) after a sharp increase in 2002 to 2.37% as a result of the crisis in Argentina.
Net extraordinary items in 2003 amounted to a loss of €103 million.
Extraordinary income amounted to €631 million in 2003, a decrease of 60.7% from 2002, and included the following items: €215 million representing gains relating to the effect of inflation accounting in certain countries in which we operate, €96 million representing gains on disposal of property and equipment and long-term financial investments, €80 million representing the recovery of interest earned in prior years and €240 million in other extraordinary gains principally due to the provision of non-banking services. See Note 28.g. to the Consolidated Financial Statements.
Extraordinary losses amounted to €734 million in 2003, a decrease of 64.0% from 2002, and included the following items: €272 million representing losses relating to the effect of inflation accounting in certain countries in which we operate, €118 million representing other losses arising from pension commitments, €52 million relating to losses on disposal of property and equipment and long-term financial investments, €87 million relating to provisions for property received in foreclosures and €205 million in other extraordinary losses.
The effective tax rate for 2003 was 24% compared to 20.9% for 2002, principally due to the change in the composition of our pre-tax profit. The corporate tax reserve amounted to €915 million in 2003, an increase of 40.1% from €653 million in 2002.
Minority interests amounted to €670 million in 2003, a decrease of 10.3% from €747 million in 2002, principally due to our redemption of three series of our outstanding preferred shares.
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As a result of the items described above, our net attributable profit amounted to €2,227 million in 2003, an increase of 29.5% from €1,719 million in 2002.
Our total assets amounted to €287 billion as of December 31, 2003, an increase of 2.7% from €280 billion as of December 31, 2002, principally due to an increase in due from credit institutions.
As of December 31, 2003, our customer funds (which include deposits, marketable debt securities, subordinated debt, mutual funds and pension funds) amounted to €296 billion, an increase of 2.3% from €289 billion as of December 31, 2002, principally due to an increase in deposits to our mutual funds and pensions plans.
As of December 31, 2003, stockholders’ equity amounted to €12.4 billion, a decrease of 0.8% from €12.3 billion as of December 31, 2002.
Results of operations by business area
As described under “Item 4. Information on the Company—Business Overview,” our business areas are the following:
In our Annual Report for the years ended December 31, 2003 and 2002, due to the economic, political and social crises that affected our Argentinean operations in such period, we provided additional disclosure on our Argentinean operations and discussed such operations as if they comprised a separate business area. In 2004, economic, political and social conditions in Argentina have stabilized and the Argentine economy has experienced significant growth. As a result of such stabilization and growth, our management no longer tracks our Argentine operations as a separate business area and, accordingly, in this Annual Report we do not discuss our Argentinean operations separately, but rather as part of the business area Banking in America, where these operations were included in our Annual Report for 2001 and for prior years. For comparability purposes in the discussion of the results of operations of our Banking in America business area below, we have restated the Banking in America business area’s results of operations for 2003 and 2002 to also include the results of operations of our Argentinean operations in such years.
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Net interest income. Net interest income for 2004 amounted to €3,348 million, a 3.9% increase from €3,221 million in 2003, principally due to due to growth in our loan portfolio and more efficient asset and liability management. Our loan portfolio amounted to €109,591 million, a 20.0% increase from €91,295 million in 2003, with particularly strong growth in mortgage loans and loans to SMEs. In 2003, net interest income amounted to €3,221 million, a 1.0% increase from €3,189 million in 2002, principally due to growth in our loan portfolio and more efficient asset and liability management, which slightly offset narrowing spreads. In 2003 our loan portfolio was €91,295 million, which was a 13.9% increase from €80,152 in 2002, principally due to strong growth in mortgage loans.
Net fee income. Net fee income for 2004 amounted to €1,647 million, an increase of 11.6% from €1,476 million in 2003, principally due to an increase in fees from mutual and pensions funds management due to an increase in assets under management. In 2003, net fee income amounted to €1,476 million, a decrease of 2.3% from €1,510 million in 2002, principally due to a decrease in underwriting fees.
Basic margin. Adding net interest income and net fee income results in a basic margin of €4,995 million in 2004, an increase of 6.3% from €4,697 million in 2003. Basic margin in 2003 decreased from €4,699 million in 2002.
Market operations. Income from market operations amounted to €54 million in 2004, an increase of 21.5% from income from market operations of €44 million in 2003, principally due to exchange rate profits in connection with providing financing for our customer’s foreign trade transactions and an increase in sales of cash management products to SMEs. In 2003, income from market operations amounted to €44 million, a decrease of 3.2% from €46 million in 2002, principally due to lower exchange rate gains.
General administrative expenses, depreciation and amortization and net other operating revenues and expenses. Operating expenses in 2004 amounted to €2,256 million, a decrease of 0.9% from €2,277 million in 2003, principally due to continued savings achieved through efficiency plans initiated in 2003, which reduced several of our expense items, including other administrative expenses, which decreased by 3.5%, and more than offset a slight increase in personnel costs of 1.0%. In 2004, depreciation and amortization charges decreased 10.8% compared to 2003. In 2003, operating expenses totaled €2,277 million, a decrease of 1.0%, with most of the reductions in operating expenses resulting from the efficiency plans initiated in 2003. In 2003, depreciation and amortization charges decreased 7.0% compared to 2002.
Net operating income. Subtracting, among other items, general administrative expenses and depreciation and amortization from ordinary revenue results in net operating income of €2,792 million in 2004, an increase of 13.3% from 2003. In 2003, net operating income amounted to €2,465 million, an increase of 0.7% from 2002.
Other items. Net loan loss provisions amounted to €580 million in 2004, an increase of 17.8% from €492 million in 2003, principally due to an increase in the size of our loan portfolio. In 2003, net loan loss provisions amounted to €492 million, an increase of 13.6% from €433 million in 2002, principally due to an increase in the size of our loan portfolio. The Retail Banking in Spain and Portugal business area’s non-performing loan ratio was 0.61% in 2004, compared to 0.85% in 2003 and 0.99% in 2002.
Net attributable profit. As a result of the items described above, net attributable profit amounted to €1,410 million in 2004, an increase of 13.8% compared to 2003. In 2003, net attributable profit amounted to €1,239 million, a decrease of 2.1% from €1,266 million in 2002.
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Net interest income. Net interest income amounted to €746 million in 2004, an increase of 10.0% from €678 million in 2003, principally due to an increase in lending and an efficient asset and liability management, despite the operations have been affected by the weakness of the U.S. dollar against the euro. In 2003, net interest income amounted to €678 million, a decrease of 5.6% from €718 million in 2002, principally due to the fall in interests rates which reduced our net interest margin and the weakness of the U.S. dollar against the euro, which negatively affected the interest income generated from our dollar-denominated assets when converted to euro and included in our Consolidated Statement of Income.
Net fee income. Net fee income amounted to €220 million in 2004, an increase of 24.0% from €177 million in 2003, principally due to an increase in fees for providing guarantees of our customers’ obligations to third parties and an increase in fee income from capital markets advisory work by our Global Markets and Distribution business unit. In 2003, net fee income amounted to €177 million in 2003, a decrease of 14.8% from €209 million in 2002, principally due to a lower level of activity in the equities markets.
Basic margin. Adding net interest income and net fee income results in a basic margin of €966 million in 2004, an increase of 12.9% from €856 million in 2003. Basic margin in 2003 decreased 7.7% from €927 million in 2002.
Market operations. Income from market operations amounted to €51 million in 2004, a decrease of 58.7% from €123 million in 2003, principally due to losses in derivative transactions we enter into to cover our exposure on products we sell to our customers. Income from market operations in 2003 increased from a loss of €5 million in 2002, principally due to severe market volatility in 2002.
General administrative expenses, depreciation and amortization and net other operating revenues and expenses. Operating expenses amounted to €315 million in 2004, a decrease of 3.1% from €325 million in 2003, principally due to reductions in personnel costs of €2 million, or 0.9%, other administrative expenses of €4 million, or 3.7%, and depreciation and amortization charges of €3 million, or 31.4%. In 2003, Operating expenses amounted to €325 million, a decrease of 5% from €342 million in 2002. In 2003, most of the cost savings were achieved in the Global Markets and Distribution business unit.
Net operating income. Subtracting, among other items, general administrative expenses and depreciation and amortization from ordinary revenue results in, net operating income of €701 million in 2004, an increase of 7.2% from €654 million in 2003. Net operating income in 2003 increased 12.6% from €580 million in 2002.
Other items. In 2004, net income from companies accounted for by the equity method amounted to €34 million, a decrease of 47.7% from €65 million in 2003, principally due to an increase in dividends, which offset the increase of net income from several of our investee companies. In 2003, net income from companies accounted for by the equity method amounted to €65 million, an increase of 209% from €21 million in 2002, principally due to an increase in the net income of several of our investee companies, particularly in the real estate sector. Net loan loss provisions amounted to €214 million in 2004, an increase of 50.1% from €143 million in 2003, principally due to an increase in our loan portfolio and the volume of guarantees we provided our customers for their obligations to third parties. Net loan loss provisions in 2003 increased 1.4% from €141 million in 2002, principally due to a moderate 3.6% increase in lending. The Wholesale and Investment Banking business area’s non-performing loan ratio was 0.19% in 2004, compared to 0.50% in 2003 and 0.76% in 2002.
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Net attributable profit. As a result of the items described above, net attributable profit amounted to €515 million in 2004, an increase of 10.1% from €468 million in 2003. Net attributable profit in 2003 increased 22.5% from €382 million in 2002.
As described above, in our Annual Report for the years ended December 31, 2003 and 2002 we provided additional disclosure on our Argentinean operations and discussed such operations as if they comprised a separate business area. As a result of improved conditions in Argentina in 2004, our management no longer tracks our Argentine operations as a separate business area and, accordingly, our Argentinean operations are included in the following discussion of our Banking in America business area, where these operations were included in our Annual Report for 2001 and for prior years. For comparability purposes in the discussion of the results of operations of our Banking in America business area below, we have restated the Banking in America business area’s results of operations for 2003 and 2002 to also include the results of operations of our Argentinean operations in such years.
As discussed above under “—Events Affecting Comparability of Historical Results of Operations and Financial Condition—Effect of the Depreciation of Latin American Currencies”, the depreciation of the currencies of the Latin American countries in which we operate against the euro was the most significant factor affecting the results of operations of our Latin American subsidiaries which generally increased more significantly in local currency terms than in euro terms. In local currency terms, our Latin American subsidiaries sought to increase business volumes and fee income in order to offset the effect of historically low interest rates on net interest margin.
Net interest income. Net interest income amounted to €3,065 million in 2004, an increase of 8.0% from €2,838 million in 2003, principally due to an increase in lending and a more efficient asset and liability management. In 2003, net interest income amounted to €2,838 million, a decrease of 23.6% from €3,715 million in 2002, principally due to depreciations in the Latin American currencies of the countries in which we have operations.
Net fee income. Net fee income totaled €1,694 million in 2004, a decrease of 1.5% from €1,720 million in 2003, principally due to the depreciation of the Latin American currencies of the countries in which we have operations, which more than offset increased fee and commission income arising from the provision of additional services to clients, principally in Mexico. In 2003, net fee income totaled €1,720 million, a decrease of 13.6% from €1,991 million in 2002, principally due to the depreciation of the Latin American currencies of the countries in which we have operations, which more than offset increased fee and commission income arising from the provision of additional services to clients.
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Basic margin. Adding net interest income and net fee income results in a basic margin of €4,759 million in 2004, an increase of 4.4% from €4,558 million in 2003. Basic margin in 2003 decreased 20.1% from €5,705 million in 2002.
Market operations. Income from market operations in 2004 amounted to €168 million, a decrease of 32.5% from €249 million in 2003, principally due to the negative effects on financial markets of an increase in interest rates, particularly in Mexico. In 2003, income from market operations amounted to €249 million, a decrease of 34.1% from €378 million in 2002, principally due to the depreciation of the currencies in Venezuela and Uruguay against the euro.
General administrative expenses, depreciation and amortization and net other operating revenues and expenses. Operating expenses amounted to €2,427 million in 2004, a decrease of 5.5% from €2,567 million in 2003, principally due to the decrease in the euro value of the expenses of our Latin American subsidiaries due to the depreciation of the Latin American currencies in the countries in which such subsidiaries are located. In 2003, operating expenses amounted to €2,567 million, a decrease of 20.3% from €3,221 million in 2002, also principally due to positive currency depreciation effects, as well as efficiency measures implemented in 2003 such as the reduction of 1,097 in headcount and the 1.7% decline in the number of branches, which limited costs increases in local currency terms.
Net operating income. Subtracting, among other items, general administrative expenses and depreciation and amortization from ordinary revenue results in net operating income of €2,500 million for 2004, an increase of 11.6% from €2,240 million in 2003. Net operating income in 2003 decreased 21.7% from €2,863 million in 2002.
Other items. In 2004, net income from companies accounted for by the equity method amounted to €83 million, an increase of 2.3% from €81 million in 2003. Net income from companies accounted for by the equity method in 2003 compared to €12 million in 2002, principally due to an increase in the net income of several of our investee companies, particularly insurance companies in which our Latin American subsidiaries own significant interests but we are not permitted to consolidate under Spanish GAAP. Net loan loss provisions amounted to €272 million in 2004, a decrease of 36.1% from €426 million in 2003, principally due to the effect of depreciations in Latin American currencies on the euro value of our Latin American subsidiaries’ loans and an improvement in the quality of such subsidiaries’ loan portfolios. Net loan loss provisions in 2003 decreased 54.7% from €940 million in 2002, principally due to the effect of depreciations in Latin American currencies on the euro value of our Latin American subsidiaries’ loans and an improvement in the quality of such subsidiaries’ loan portfolios and recoveries from restructured debts in previous years. The Banking in America’s NPL ratio was 3.18% in 2004, compared to 4.46% in 2003 and 5.44% in 2002. The loan coverage ratio was 145.2% in 2004, compared to 140.5% in 2003 and 164.3% in 2002.
Minority interests. In 2004, Minority interests amounted to €220 million, a decrease of 50.6% from €446 million in 2003, principally due to the decrease of minority interests in Bancomer following the completion of our tender offer for all of Bancomer’s outstanding shares whereby we increased our interest in Bancomer from approximately 59.43% to more than 99%.
Net attributable profit. As a result of the items described above, net attributable profit amounted to €1,239 million in 2004, an increase of 70.8% from €725 million in 2003. Net attributable profit in 2003 decreased 0.1% from €726 million in 2002.
Net operating expense
Net attributable loss
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Net interest income. In 2004, net interest expenses amounted to €91 million compared to net interest income of €4 million in 2003, principally due to an increase in costs related to our investments in Latin America, primarily relating to our acquisition of Bancomer, and increased costs relating to derivates we enter into to hedge exchange rate risks.
Net interest income in 2003 decreased 97.8% from €185 million in 2002, principally due to our sale of BBV Brasil in June 2003, which accounted for net interest income of €301 million in 2002, but was partially offset by the higher dividends collected from investee companies, which increased by 82% over 2002.
Net fee income. Net fee expense amounted to €181 million in 2004, an increase of 63.6% from net fee expense of €111 million in 2003, principally due to the increased allocation of fee income to other business areas and due to increased remuneration paid to our branch network for their work in assisting in the distribution of preferred or debt securities issued by us.
Net fee expense in 2003 increased 170.5% from net fee expense of €41 million in 2002, principally due to our sale of BBV Brasil in June 2003, which accounted for net income of €58 million in 2002.
Basic margin. Adding net interest income and net fee income results in a basic margin of a loss of €271 million in 2004. In 2003, basic margin was a loss of €107 million.
Market operations. Income from market operations amounted to €333 million in 2004, an increase of 41.2% from €236 million in 2003, principally due to significant hedging, derivatives and other securities transactions by our Assets and Liabilities Committee (“ALCO”) in 2004 , as well as gains from the portfolio of shareholdings held by the Large Industrial Corporations business unit. Income from market operations in 2003 decreased 32.0% from €347 million in 2002, principally due to significant hedging, derivatives and other securities transactions by ALCO in 2002.
General administrative expenses, depreciation and amortization and net other operating revenues and expenses. Operating expenses amounted to €615 million in 2004, an increase of 3.7% from €593 million in 2003. Operating expenses in 2003 decreased 26.3% from €805 million in 2002, principally due to our sale of BBV Brasil, which accounted for operating expenses of €236 million in 2002.
Net operating expense. Subtracting, among other items, general administrative expenses and depreciation and amortization from ordinary revenue results in net operating expenses of €553 million in 2004, an increase of 19.1% from €464 million in 2003.
Net income from companies accounted for by the equity method. Net income from companies accounted for by the equity method amounted to €268 million in 2004, an increase of 17.6% from €228 million in 2003, principally due to the improvement in the earnings of our investee companies. Net income from companies accounted for by the equity method increased to €228 million in 2003 from €7 million in 2002 as a result of the change in accounting of the operating results of BBV Brasil during the first half of 2003, which, as a result of our agreement to sell BBV Brazil in January 2003, was accounted for under the equity method until the closing of the sale in June 2003 but was accounted for under full consolidation in 2002.
Amortization of consolidation goodwill. Since goodwill arises as a result of transactions undertaken by BBVA that, directly or indirectly, affect all of our business areas, all of our consolidated goodwill is recorded in the Corporate Activities and Other business area. Goodwill amortization charges amounted to €579 million in 2004, a decrease of 9.1% from €637 million in 2003. Goodwill amortization charges in 2003 decreased 5.6% from €675 million in 2002.
Net income on Group transactions. Net income on Group transactions amounted to €404 million in 2004, a decrease of 20.5% from €508 million in 2003, principally due to large divestments carried out during 2003. Net income on Group transactions in 2003 increased 84.1% from €276 million in 2002, principally due to the recording of a loss of €189 million from our sale of BBV Brasil in 2002.
Net loan loss provisions. Net loan loss recoveries amounted to €135 million in 2004, compared to net loan loss provisions in 2003 of €216 million, principally due to a reduction in provisions for country risk. Unlike other loan loss provisions which are recorded by each business area in respect of its loan portfolio, all of our country risk provisions are recorded in the Corporate Activities and Other business area. Net loan loss provisions in 2003 decreased 5.6% from €229 million in 2002, principally due to the reversal of provisions related to Argentine loans in 2002.
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Net attributable loss. As a result of the items described above, net attributable loss amounted to €363 million in 2004, an increase of 76.3% from €206 million in 2003. Net attributable loss in 2003 decreased 68.6% from €656 million in 2002.
B. Liquidity and Capital Resources
Our principal source of funds is our customer deposit base, which consists primarily of demand, savings and time deposits. In addition to relying on our customer deposits, we also access the interbank market (overnight and time deposits) and domestic and international capital markets for our additional liquidity requirements. To access the capital markets, we have in place a series of domestic and international programs for the issuance of commercial paper and medium- and long-term debt. We also generally maintain a diversified portfolio of liquid assets and securitized assets. Another source of liquidity is our generation of cash flow. Finally, we supplement our funding requirements, to a very limited extent, with borrowings from the Bank of Spain, mostly short-term and at market interest rates, which is a common practice in Spain.
The following table shows the balances in 2004, 2003 and 2002 of our principal sources of funds:
Due to credit entities
Debt securities in issue
As of June 8, 2005, BBVA has issued the following:
Deposit Base
Our total customer funds (customer deposits, excluding assets sold under repurchase agreements, marketable debt securities and subordinated debt) amounted to €130 billion as of December 31, 2004, a increase of 3.96% from €125 billion as of December 31, 2003. Including assets sold under repurchase agreements, customer funds amounted to €147 billion as of December 31, 2004, an increase of 4.3% from €141 billion as of December 31, 2003. Customer funds increased principally due to an increase in time deposits.
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Interbank and Capital Markets
We have increased debt issuances in the domestic and international capital markets in order to finance our activities and as of December 31, 2004, we had €44,327 million of senior debt outstanding, comprising €38,037 million in bonds and debentures and €6,290 million in promissory notes and other securities, compared to €34,383 million, €28,259 million and €6,124 million outstanding as of December 31, 2003, respectively. See Note 19 to the Consolidated Financial Statements. A total of €8,108 million in subordinated debt and €3.8 billion in preferred stock issued or guaranteed by BBVA was outstanding as of December 31, 2004, compared to €7,399 million and €3.9 billion outstanding as of December 31, 2003, respectively. See Notes 21 and 22 to the Consolidated Financial Statements.
The average maturity of our outstanding debt as of December 31, 2004 was the following:
The cost and availability of debt financings are influenced by credit ratings. A reduction in these ratings could increase the cost of, and reduce our access to, debt financing. As of December 31, 2004, our credit ratings were as follows:
Moody’s
Fitch—IBCA
Standard & Poor’s
On April 4, 2002, Standard & Poor’s revised its rating outlook for BBVA to negative from stable, based on the potential impact on BBVA of a deterioration of Argentina’s financial system. The main ratings agencies, Moody’s, Fitch-IBCA and Standard & Poor’s, confirmed a stable outlook for BBVA in 2002. In 2003 and 2004 our ratings did not change.
In July and December 2004, BBVA Capital Finance, S.A.U., a wholly-owned subsidiary of BBVA, issued preferred stock amounting to €500 and €1,125 million, respectively. In 2004, we redeemed several series of preferred shares issued by our financing subsidiaries: (i) on June 30, 2004, €700 million nominal amount of series B preferred shares issued by BBVA International bearing a 6.24% coupon and (ii) on December 31, 2004, €1,000 million nominal amount of series C preferred shares issued by BBVA International bearing a 5.76% coupon.
Generation of Cash Flow
We operate in Spain and over 20 other countries, mainly in Europe and Latin America. Other than in Argentina and Venezuela, we are not aware of any legal or economic restrictions on the ability of our subsidiaries to transfer funds to our parent company in the form of cash dividends, loans or advances, capital repatriation or other manners. There is no assurance that in the future such restrictions will not be adopted or that, if adopted, they will not negatively affect our liquidity. The geographic diversification of our businesses, however, limits the effect of any restrictions that could be adopted in any given country.
We believe that our working capital is sufficient for our present requirements and to pursue our planned business strategies.
Contractual Obligations
Our consolidated contractual obligations as of December 31, 2004 are as follows:
Senior debt
Subordinated debt
Capital lease obligations
Operating lease obligations
Purchase obligations
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Other contingent liabilities and commitments
In addition to loans, we had outstanding the following contingent liabilities and commitments at the dates indicated:
Contingent liabilities:
Rediscounts, endorsements and acceptances
Guarantees and other sureties
Other contingent liabilities
Total contingent liabilities
Commitments:
Balances drawable by third parties:
Public authorities
Other domestic sectors
Non-domestic sectors
Total balances drawable by third parties
Other commitments
Total commitments
Total contingent liabilities and commitments
Off-balance sheet arrangements
In addition to the contingent liabilities and commitments described above, as of December 31, 2004, 2003 and 2002, we had entered into additional transactions which, pursuant to applicable law, are not required to be reflected in our Consolidated Financial Statements. The following table provides information regarding the notional or contractual value of these transactions as of December 31, 2004, 2003 and 2002:
Foreign currency purchase and sale transactions and swaps
Foreign currency purchases against euro
Foreign currency purchases against foreign currencies
Foreign currency sales against euro
Financial asset purchase and sale transactions
Purchases
Sales
Forward rate agreements (FRA)
Bought
Sold
Interest rate swaps
Securities swaps
Interest rate futures
Securities futures
Interest rate options
Securities options
Foreign currency options and futures
Other transactions
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The notional or contractual amounts of these transactions do not necessarily reflect the actual risk assumed by us, since our net position in these financial instruments is often the result of offsetting or combining multiple transactions. This net position, even if it is not deemed a hedge for accounting purposes, is used by us generally to eliminate or significantly reduce interest rate, market or exchange risk. The resulting gains or losses on these transactions are included under the market operations caption in our Consolidated Statement of Income. Any gains or losses on hedging transactions are included as an increase in, or offset of, the results on the positions covered by them.
The following table provides information regarding off-balance-sheet funds managed by us as of December 31, 2004, 2003 and 2002:
Mutual funds
Pension funds
Other managed assets
Our off-balance sheet funds increased in 2004 principally due to the launch of new products and the positive change in market trends over the course of 2004.
See Note 26 to the Consolidated Financial Statements for additional information with respect to our off-balance sheet arrangements.
Agreement with Terra Networks
In connection with the agreement by BBVA and Terra Networks to integrate Uno-e Bank and the individual consumer financing business of Finanzia (part of the Retail Banking in Spain and Portugal business area), BBVA has entered into an agreement with Terra Networks which gives Terra Networks a liquidity mechanism over its shares in the combined entity and that replaces a previous liquidity mechanism entered into on May 15, 2002. The current liquidity mechanism provides Terra Networks the right to sell its stake in Uno-e Bank to BBVA between April 1, 2005 and September 30, 2007 at a price equal to the higher of (i) the market value of the securities as determined by an investment bank, and (ii) the amount obtained by multiplying (a) the after-tax profits of Uno-e Bank times (b) BBVA’s price/earnings ratio times (c) the percentage holding in Uno-e Bank that Terra Networks intends to sell. However, in no event can the sale price under (i) or (ii) above be less than €148.5 million if Uno-e Bank does not achieve certain net ordinary revenue and pre-tax income targets.
Capital
Under the Bank of Spain’s capital adequacy regulations, as of December 31, 2004, 2003 and, 2002, we were required to have a ratio of consolidated stockholders’ equity to risk-weighted assets and off-balance sheet items (net of certain amounts) of not less than 8%.
As of December 31, 2002, our ratio of total capital to risk-weighted assets was 11.80% and our shareholders’ equity exceeded the minimum level required by 26%. As of December 31, 2003 this ratio was 10.40% and our shareholders’ equity exceeded the minimum level required by 30%. As of December 31, 2004, this ratio was 10.67% and our shareholders’ equity exceeded the minimum level
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required by 30%. However, based purely on the framework of the Basel Accord and using such additional assumptions as we consider appropriate, we have estimated that as of December 31, 2002, 2003 and 2004 our consolidated Tier I risk-based capital ratio was 8.4%, 8.5% and 8.1%, respectively, and our consolidated total risk-based capital ratio (consisting of both Tier I capital and Tier II capital) was 12.5%, 12.7% and 12.5%, respectively. The Basel Accord recommends that these ratios be at least 4% and 8%, respectively.
For qualitative and quantitative information on the principal risks we face, including market, credit, liquidity, operational and legal risks, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.
C. Research and Development, Patents and Licenses, etc.
The research and development activity of BBVA has the main objective of improving the productivity and efficiency of our internal processes and the processes related to our interaction with clients.
With respect to our internal processes, we are actively striving to enhance our efficiency through our corporative Intranet, holding virtual meetings and multi-conferences, the creation of knowledge communities and facilitating the ability of our employees to work remotely.
With respect to client processes, we are working to develop the bank branch of the future which will take advantage of the newest technologies, such as regarding multimedia applications, communications and broadband. In addition, we are working to develop technology to facilitate customer transactions and improve their security.
We did not incur significant research and development expenses in 2002, 2003 and 2004.
D. Trend Information
The European financial services sector is likely to remain competitive with increasing numbers of providers of financial services and alternative distribution channels. Further consolidation in the sector (through mergers, acquisitions or alliances) is likely as the other major banks look to increase their market share or combine with complementary businesses. It is foreseeable that regulatory changes will take place in the future that will diminish barriers to such consolidation transactions.
The following are the most important trends, uncertainties and events that are reasonably likely to have a material adverse effect on us or that would cause the financial information disclosed herein not to be indicative of our future operating results or financial condition:
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
BBVA recognizes the importance of a strong system of corporate governance, in particular for a large financial institution. In addition, BBVA understands corporate governance to be a dynamic process that must be periodically analyzed and updated in light of our assessments of the performance of our existing corporate governance structures and evolving regulations, recommendations and market practice in Spain and elsewhere.
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Accordingly, to adapt its corporate governance structure to new requirements recently enacted in Spain, BBVA’s Board of Directors has approved a series of regulations for the Board of Directors that reflect the principles and elements that have shaped and continue to guide BBVA’s system of corporate governance. First, the Board of Directors approved the Regulations of the Board of Directors, which comprises the standards governing the functions and operations of the Board of Directors and its Committees and sets forth the duties and responsibilities of directors, which were formerly set forth in the Directors’ Code. Second, on February 28, 2004, BBVA’s shareholders approved the Regulations of the Shareholders’ Meeting, which provides for certain matters related to shareholders’ rights required under Spanish law. BBVA also has a Code of Ethics and Conduct which applies to the Board of Directors as well as all BBVA employees.
Our Board of Directors has approved BBVA’s report on corporate governance for the year ended December 31, 2004, prepared in accordance with Spanish regulations governing companies listed on a stock exchange. This report contains a description of BBVA’s system of corporate governance and the internal codes described above and can be found on BBVA’s website at www.bbva.com.
A. Directors and Senior Management
BBVA is managed by a Board of Directors, which, in accordance with BBVA’s current bylaws (Estatutos), as approved by the General Shareholders Meeting on February 28, 2004, must consist of no less than 9 and no more than 16 members. In accordance with the resolutions approved by the General Shareholders’ Meeting on February 26, 2005, we currently have 15 directors.
Directors are appointed to the Board of Directors by our shareholders. All members of the Board of Directors are elected to serve five-year terms. One-fifth of the members are subject to re-election every year by the shareholders at a general meeting. Directors must resign at the age of 70. The Chairman of the Board must resign his or her chairmanship upon reaching the age of 65, but may continue to serve as a director thereafter, until reaching the age of 70. The President and Chief Operating Officer and other executive directors must resign from their management positions upon reaching the age of 62, at which point they must also submit their resignation as directors to the Board of Directors. The Board of Directors may nonetheless determine that such executive directors may continue to serve on the Board of Directors.
According to BBVA’s Regulations of the Board of Directors, at least two-thirds of the members of the Board of Directors must be independent. We consider directors to be independent when they do not hold any other position with BBVA or any of our subsidiaries and they:
An institutional director is an external director designated by virtue of her or his relationship with a person or entity that is a significant shareholder of BBVA. For this purpose we consider a significant shareholder to be a person or entity that owns, directly or indirectly, at least 5% of the share capital or voting rights of BBVA. If a lower percentage of shares or voting rights allows such person or entity to exercise significant influence over BBVA, such person or their designee shall also be considered an institutional director.
Regulations of the Board of Directors
The following discussion provides a brief description of several significant matters covered in the Regulations of the Board of Directors.
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Appointment and Re-election of Directors
The Regulations of the Board of Directors provide that the qualifications of the persons proposed for appointment as directors shall be assessed by the Appointments and Compensation Committee of the Board of Directors with due reference to the candidates’ personal and professional attributes, as well as the needs of BBVA’s governing bodies.
When proposals for re-electing directors are made, the Board of Directors will evaluate the performance of directors proposed for a further term, their dedication, and such other considerations that may affect the advisability of reelecting such directors.
Term of Directorships
Directors shall retire from their directorships at the age of 70 except our Chairman and Chief Executive Officer who shall retire from his executive position at the age of 65, but may continue to serve on the Board of Directors until reaching age 70. Resignation should occur in the first session of the Board of Directors to be held after the General Shareholders’ Meeting that approves the accounts for the year in which a director reaches age 65 or 70 as the case may be.
Executive directors, other than our Chairman and Chief Executive Officer, are required to resign from their management positions at the age of 62, following the same timing rules as established in the paragraph above. Following such resignation, the executive director shall place his or her directorship at the disposal of the Board of Directors, which may agree that they should continue to serve as a member of the Board of Directors, notwithstanding their resignation from their executive position.
Non-executive directors shall cease to be members of any Committee of the Board of Directors three years after they are appointed, although the Board of Directors may re-appoint them.
One-fifth of the members of the Board of Directors shall be elected by the General Shareholders’ Meeting each year. Directors may serve an unlimited number of terms.
Performance of Directors’ Duties
The members of the Board of Directors shall carry out the duties inherent in their directorship and membership on any Board Committee in accordance with applicable law, BBVA’s bylaws, the Regulations of the Board of Directors and resolutions adopted by BBVA’s Board of Directors.
Each director will be required to attend the meetings of the Board of Directors and Committees of which he or she is a member, except in cases duly justified, and participate in the deliberations, discussions and debates thereof with regard to the matters which arise at such meetings.
The directors shall have sufficient information to be able to form opinions on issues raised by the Board of Directors and its Committees, and the information shall be furnished as far in advance as required. Additionally, directors may propose to the Board of Directors that external experts be consulted to assist the Board to consider matters of special complexity or importance.
Directors shall keep confidential the deliberations of the Board of Directors and the Committees of which he or she is a member, and all information to which they may have access in the discharge of their duties, which they shall use exclusively in pursuit of their duties and with due diligence. Directors’ obligation of confidentiality shall remain in force after they have ceased to serve on the Board of Directors.
Ethics and Code of Conduct
Directors shall behave ethically in their activities and in good faith, consistent with applicable statutory, requirements and the principles comprising BBVA’s values.
The Regulations of the Board of Directors regulate conflicts of interest that may arise between, the interests of the directors and/or their family members, and the interests of BBVA and set forth the circumstances where a director’s activities may be incompatible with their duties as a member of the Board of Directors.
Directors shall abstain from attending and taking part in matters which may give rise to a conflict of interest.
Directors shall not be present during the deliberations of the Board of Directors or Committees of which he or she is a member when such deliberations relate to matters in which they may have a direct or indirect interest. Directors are also prohibited from carrying out personal, professional or commercial transactions with BBVA or its subsidiaries, other than normal banking transactions, unless such transactions are entered into in connection with transparent and open bidding procedures and at market prices.
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Directors shall also abstain from having a direct or indirect stake in businesses or companies in which BBVA or its subsidiaries has an interest, unless (i) the stake predates their joining the Board of Directors, or BBVA or its subsidiaries acquires its or their interest, as the case may be, after they join the Board of Directors, (ii) the companies are listed on a domestic or international stock exchange, or (iii) the director’s stake is authorized by the Board of Directors.
Directors may not use their position with BBVA to obtain, directly or indirectly, a material advantage, nor take advantage of any business opportunity of which they become aware as a result of their membership on the Board of Directors.
Incompatibilities
In pursuit of their duties, directors shall be subject to rules on incompatible activities.
The Regulations of the Board of Directors establish specific rules regarding director activities that are incompatible membership on the Board of Directors, except for those cases expressly authorized by the Board.
Under the incompatibility rules, directors may not: (i) provide professional services or be an employee, manager or director of companies competing with BBVA or any of BBVA’s subsidiaries; (ii) hold a directorship or equivalent position in any company in which BBVA holds an interest or (iii) perform any activity that may in any way adversely affect BBVA’s public image.
As an exception, on our initiative, executive directors may perform management tasks in subsidiaries directly or indirectly controlled by BBVA with the consent of the Executive Committee, and other companies in which BBVA participates with the consent of the Board of Directors.
The non-executive directors may serve as directors for companies in which BBVA directly or indirectly holds an ownership interest if such position is not held as a result of our ownership interest and with the prior consent of the Board of Directors. This limitation does not apply where we have acquired an interest in another company in the ordinary course of our asset management, derivatives coverage or other similar business lines.
Dismissal of Directors
In the event of breaching the Regulations of the Board of Directors, a director shall present their resignation to the Board of Directors and accept the Board’s decision whether or not they may continue as a director. Should the Board of Directors decide that they should not, they shall tender their resignation in the following cases:
Incompatibility After Severance
Directors who cease to belong to the Board of Directors may not provide services to any other financial institution competing with BBVA or any of its subsidiaries for two years after leaving the Board of Directors, unless the Board of Directors expressly authorizes otherwise. Such authorization may be denied on the ground of BBVA’s best interest.
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The Board of Directors
The Board of Directors is currently comprised of 15 members. The following table sets forth the names of the members of the Board of Directors as of the date of this Annual Report on Form 20-F, their date of appointment and, if applicable, reelection, their current positions and their present principal outside occupation and five-year employment history.
Name
Current Position
Date Nominated
Date Reelected
Present Principal Outside Occupation and
Five-Year Employment History(*)
President and Chief
Operating Officer
October 29,
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May 28,
March 1,
Executive Officers (“Comité de Dirección”)
Our executive officers were each appointed for an indefinite term. Their positions as of the date of this Annual Report on Form 20-F are as follows:
Chairman and Chief
Executive Officer
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Compliance with NYSE Listing Standards on Corporate Governance
On November 4, 2003, the SEC approved new rules proposed by the New York Stock Exchange (the “NYSE”) intended to strengthen corporate governance standards for listed companies. In compliance therewith, the following is a summary of the significant differences between our corporate governance practices and those applicable to domestic issuers under the NYSE listing standards.
Independence of the Directors on the Board of Directors and Committees
Under the NYSE corporate governance rules, (i) a majority of a U.S. company’s board of directors must be composed of independent directors, (ii) a majority of the audit committee must be composed of independent directors and by July 31, 2005, all members of the audit committee must be independent and (iii) all U.S. companies listed on the NYSE must have a compensation committee and a nominations committee and all members of such committees must be independent. In each case, the independence of directors must be established pursuant to highly detailed rules promulgated by the NYSE and, in the case of the audit committee, the NYSE and the SEC.
Spanish law does not contain any requirement that members of the board of directors or the committees thereof be independent, nor does Spanish law provide any definition of what constitutes independence for the purpose of board or committee membership or otherwise. In addition, Spanish law does not require that a company have a compensation committee or a nominations committee, although there is a non-binding recommendation for listed companies in Spain to have these committees and for them to be composed of a majority of non-executive directors. In practice, Spanish companies generally have three types of directors: executive directors, directors dominicales appointed by an individual stockholder due to the size of its shareholding and independent directors.
As described above under “—Directors and Senior Management,” BBVA considers directors to be independent when they do not hold any other position with BBVA or any of our subsidiaries and they:
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We have not determined whether the members of our Board of Directors or its Committees would be considered independent under NYSE and SEC rules. We note, however, that our Board of Directors has a large majority of non-executive directors and 10 out of the 15 members of our Board are independent under the definition of independence described above. In addition, our Audit and Compliance Committee is composed exclusively of independent directors and the committee Chairman is required to have experience in financial management and an understanding of the standards and accounting procedures required by the governmental authorities that regulate the banking sector. In accordance with the non-binding recommendation, BBVA’s Board of Directors has created an Appointments and Compensation Committee which is composed exclusively of independent directors.
Separate Meetings for Independent Directors
In accordance with the NYSE corporate governance rules, independent directors must meet periodically outside of the presence of the executive directors. Under Spanish law, this practice is not contemplated as such. We note, however, that our independent directors meet periodically outside the presence of our executive directors anytime the Audit and Compliance Committee or the Appointments and Compensation Committee meet, since these Committees are comprised solely of independent directors. In addition, our independent directors meet outside the presence of our executive directors as often as they deem fit, and usually prior to meetings of the Board of Directors or its Committees.
B. Compensation
Under BBVA’s bylaws, the Board of Directors is permitted to distribute up to four percent of BBVA’s annual net income to its members, but only after legally required reserve provisions have been made and after distribution of four percent of BBVA’s net income in the form of dividends to its shareholders.
The Board of Directors, at the proposal of the Appointments and Compensation Committee, which is comprised solely of independent directors, approves BBVA’s system for remuneration of members of the Board of Directors. The compensation criteria adopted by the Appointments and Compensation Committee are based on the responsibilities of the members of the Board of Directors, including their service on Board Committees, as well as the limitations service on the Board of Directors and its Committees places on other professional activities that may be pursued by the directors. In 2003, this Committee adopted criteria for the compensation of directors and determined that executive directors would be compensated solely pursuant to their employment contracts relating to their executive positions with BBVA.
The following table presents information regarding the compensation (in thousands of euro) accrued to each member of our Board of Directors serving during 2004.
Director(1)(2)
Alvarez Mezquiriz, Juan Carlos
Breeden, Richard C.
Bustamante y de la Mora, Ramón
Fernández Rivero, José A.(3)
Ferrero Jordi, Ignacio
Knörr Borrás, Román
Lacasa Suárez, Ricardo
Loring Martínez Irujo, Carlos
Medina Fernández, Enrique
Rodríguez Vidarte, Susana
San Martín Espinós, José María
Telefónica de España
TOTAL
Notes:
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Compensation to BBVA’s executive directors, which under BBVA’s bylaws must be based solely on their employment contracts relating to their executive positions with BBVA, in 2004 was as follows (in thousands of euro):
Chairman of the Board
Chief Operating Officer & President
General Secretary
In addition, as a result of the termination of the “Two Thousand” stock option incentive program in 2004, José Ignacio Gorigolzarri Tellaeche received approximately €22,000 for the options he held under such program.
In 2004, compensation for all executive officers (excluding executive directors) amounted to €3.5 million of fixed remuneration and €4.8 million of variable remuneration.
The following table provides the accrued pension benefits for the non-executive members of the Board of Directors as of December 31, 2004 (in thousands of euro):
Directors
Álvarez Mezquiriz, Juan Carlos
Fernández Rivero, José Antonio
Loring Martínez de Irujo, Carlos
In addition, during 2004 a total of €95,000 was paid in medical and accident insurance premiums for the Board of Directors as a whole.
Accrued pension benefits (in euro) for executive directors as of December 31, 2004 were as follows (in thousands of euros):
Executive Directors
Secretary General
As of December 31, 2004, total accrued pension benefits for all executive officers (excluding executive directors) amounted to €25.6 million.
Indemnity Payments
The executive directors of BBVA (Chairman and Chief Executive Officer, President and Chief Operating Officer and Secretary General) have the right, under Article 50 bis of our by-laws, to receive an indemnity payment upon termination of their employment in the case when this has been reflected in the contracts that determine their statutory rights that were entered into in 2001 (Chairman and Chief Executive Officer and Secretary General) and 2002 (President and Chief Operating Officer) and approved by the independent members of the Appointments and Compensation Committee, in function of delegation of a joint nature, which was conferred by our Board of Directors, according to the terms described below, all of which have been made known to our Board of Directors.
In the case of termination of employment for causes other than voluntary termination, retirement, disability or gross negligence to perform their duties, BBVA will pay an indemnity consistent with the amount that results from the multiplication by 5 times the amount of total compensation received in the last full fiscal year prior to the termination, including fixed pay and variable pay.
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In addition, the terminated indemnified director shall also be entitled to receive an amount equal to the cumulative value of pension benefits accrued on behalf of such director in accordance with actuarial studies and regulations governing pension benefits currently in force.
In order to receive these indemnity payments, the executive director must resign as a director and executive officer of BBVA and renounce any other entitlements to indemnity payments they may have in addition to the payments described above. In addition, the terminated indemnified executive director shall be prohibited from working for companies that compete with BBVA or its affiliates for two years following such director’s termination.
Incentive Plans
There is no current incentive program for executive directors and senior managers in effect that is linked to the performance of BBVA’s shares.
BBVA’s senior management participates in an incentive plan providing them with possible additional variable non-share based compensation in 2006 if BBVA meets certain specified performance targets in 2003, 2004 and 2005.
Advance Payments and Personal Loans to Directors and Executive Officers
The total of advance payments and personal loans granted by BBVA and its consolidated subsidiaries to the members of the Board of Directors and outstanding as of December 31, 2004 amounted to €128,000 at interest rates between 4% and 5%, of which €92,000 was granted to executive directors and €36,000 to non-executive directors. As of December 31, 2004, no guarantees had been extended to secure obligations or commitments of members of the Board of Directors.
The total of advance payments and personal loans granted by BBVA to executive officers (excluding executive directors) and outstanding as of December 31, 2004 amounted to €1,314,000. As of December 31, 2004, no guarantees had been extended to secure executive officers’ obligations or commitments.
C. Board Practices
Committees
The Board of Directors has created the Executive Committee, the Audit and Compliance Committee, the Appointments and Compensation Committee and the Risk Committee. These Committees are discussed below.
Executive Committee
BBVA’s Board of Directors is assisted in fulfilling its responsibilities by the Executive Committee (Comisión Delegada Permanente) of the Board of Directors, which, under BBVA’s Regulations of the Board of Directors, must be comprised of at least half plus one independent director. The Board of Directors delegates all management functions, except those that it must retain due to legal or statutory requirements, to the Executive Committee.
As of June 30, 2005, BBVA’s Executive Committee was comprised of two executive directors and four independent directors, as follows.
Mr. Román Knörr Borrás
Mr. Enrique Medina Fernández
Mr. José María San Martín Espinós
Mr. Juan Carlos Álvarez Mezquíriz
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The Executive Committee is also responsible for the matters delegated to it by the Board of Directors, so long as such matters are also consistent with its authority as set forth in BBVA’s bylaws. Such matters include the management of BBVA and establishment of BBVA’s general policy guidelines, review and authorization of investments by BBVA, approval or rejection of transactions and initiation of internal investigations and audits in any area of BBVA’s business. The Executive Committee generally holds meetings two times a month, but may meet as often as deemed necessary by the Committee chairman or at the request of a majority of the Committee’s members. During 2004, the Executive Committee held a total of 20 meetings.
The Executive Committee is also responsible for evaluating BBVA’s system of corporate governance, which it assesses in the context of ongoing developments generally affecting BBVA and new legislative or regulatory initiatives or recommendations in Spain and elsewhere regarding corporate governance.
Audit and Compliance Committee
The Audit and Compliance Committee supervises preparation of BBVA’s consolidated financial statements and is responsible for the functioning of BBVA’s internal control function. The Audit and Compliance Committee is required under our bylaws to have a minimum of four members, one of whom acts as Chairman, appointed by the Board of Directors. The committee Chairman is required to have experience in financial management and an understanding of the standards and accounting procedures required by the governmental authorities that regulate the banking sector. In accordance with the Regulations of the Board of Directors, the Audit and Compliance Committee must be comprised only of independent directors, who may not also be members of the Executive Committee.
At June 30, 2005, the Audit and Compliance Committee members were:
Chairman:
Members:
Mr. Ramón Bustamante y de la Mora
Mr. Ignacio Ferrero Jordi
Mr. Carlos Loring Martínez de Irujo
Mrs. Susana Rodríguez Vidarte
The Audit and Compliance Committee’s governing charter, which has been approved by the Board of Directors, sets forth its responsibilities and procedures . The Audit and Compliance Committee is generally responsible for assisting the Board of Directors with preparation of BBVA’s Consolidated Financial Statements and supervising BBVA’s internal control procedures.
In this regard, the Audit and Compliance Committee’s principal responsibilities include:
To ensure the accuracy, reliability, sufficiency and clarity of BBVA’s Consolidated Financial Statements, the Audit and Compliance Committee closely supervises the preparation of such financial statements, holding frequent meetings with BBVA executives responsible for preparation of the Consolidated Financial Statements as well as with BBVA’s external auditor.
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The Audit and Compliance Committee is responsible for selecting BBVA’s external auditor, which is appointed at the General Shareholders Meeting, and supervising the performance by such external auditor of the services it was contracted to perform, in accordance with the terms of the engagement. In particular, the Audit and Compliance Committee’s supervision of the external auditor is aimed at ensuring compliance with regulatory requirements as well as with BBVA’s internal policies.
The Audit and Compliance Committee is responsible for ensuring that BBVA’s external auditor is independent. This duty is discharged by the Audit and Compliance Committee through its monitoring of the external auditor’s activities, including assessing whether any report, opinion or recommendation delivered by the external auditor is conditioned on any other relationship of the external auditor with BBVA and by prohibiting the delivery of consulting and auditing services by the same external auditing firm, other than in special circumstances receiving the Committee’s (or the Chairman’s, if such authority is delegated to him) specific prior approval.
The Audit and Compliance Committee is also responsible for supervising BBVA’s internal audit and reviews and approves BBVA’s internal audit schedule for each fiscal year and monitors the execution of the internal audit through ongoing contact with BBVA’s chief internal audit officer. During the year ended December 31, 2004, the Audit and Compliance Committee held a total of 12 meetings.
In order to effectively discharge its duties, the Audit and Compliance Committee may request that BBVA staff from any area of its operations attend its meetings to provide additional information or expertise regarding any topic on the Committee’s agenda. External experts may also be contracted to attend Committee meetings to provide expertise in areas relevant to the Committee’s duties that, due to their technical nature or as a result of conflicts of interest that may exist, cannot be advised upon by internal staff.
Appointments and Compensation Committee
The Appointments and Compensation Committee assists the Board of Directors in selecting candidates proposed to be appointed as members of the Board of Directors and in setting director compensation, though the Board of Directors itself must approve such matters. On behalf of the Board of Directors, this Committee evaluates the qualification of the persons proposed to be appointed as members of the Board of Directors and considers the suitability of the candidates’ personal and professional attributes for such appointment. The Committee also assists the Board of Directors with setting director compensation, taking into account the responsibilities of members of the Board of Directors as well as the limitations service on the Board of Directors places on other professional activities that may be pursued by the directors. The Appointments and Compensation Committee determines the remuneration and other benefits for BBVA’s Chairman and CEO and other executive directors. The Committee also analyzes proposals for multi-annual incentive plans for senior management.
Pursuant to the Regulations of the Board of Directors, the Appointments and Compensation Committee is required to have a minimum of three members, all of which must be independent.
As of June 30, 2005, the members of the Appointments and Compensation Committee were:
During 2004, the Appointments and Compensation Committee held a total of 6 meetings. The Committee may meet as often as it deems necessary in order to discharge its responsibilities.
The Appointments and Compensation Committee may request that BBVA staff from any area of its operations attend its meetings to provide additional information or expertise regarding any topic on the Committee’s agenda. External experts may also be contracted to attend Committee meetings to provide expertise in areas that, due to their technical nature or as a result of conflicts of interest that may exist, cannot be advised upon by internal staff.
Risk Committee
The Risk Committee is responsible for supervising the analysis and periodic monitoring of the various risks BBVA faces on behalf of the Board of Directors. Though the Executive Committee is required to approve BBVA’s overall risk strategies and policies, the Risk
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Committee analyzes these matters and makes recommendations to the Executive Committee relating thereto. The Risk Committee also monitors the overall level of credit, market and other risks BBVA assumes, reviews transactions delegated to it for approval and verifies that BBVA has established the procedures and structures representing the best practices for risk management in the market.
The Committee is required to be comprised of a majority of non-executive directors. At June 30, 2005, the members of the Risk Committee were:
Mr. Ricardo Lacasa Suárez
Mr. José Maldonado Ramos
The Risk Committee is governed by a charter approved by the Board of Directors. The charter states that the Risk Committee may meet as often as necessary to discharge its responsibilities. During 2004, the Risks Committee held a total of 84 meetings.
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D. Employees
As of December 31, 2004, we, through our various affiliates, had 84,117 employees. Approximately 73.87% of our employees in Spain held technical, managerial and executive positions, while the remainder were clerical and support staff. The table below sets forth the number of BBVA employees by geographic area.
Country
France
Italy
Germany
Switzerland
Portugal
Belgium
Jersey
Russia
Andorra
Ireland
Gibraltar
Total Europe
Securities New York
New York
Miami
Grand Cayman
Total North America
Brazil
México
Bolivia
El Salvador
Dominican Republic
Cuba
Ecuador
Total Latin America
Hong Kong
Japan
Iran
China
Total Asia
The terms and conditions of employment in private sector banks in Spain are negotiated with trade unions representing bank employees. Wage negotiations take place on an industry-wide basis. This process has historically produced collective bargaining agreements binding upon all Spanish banks and their employees. A new collection bargaining agreement came into effect as of January 1, 2005 and will apply through December 31, 2006. As of December 31, 2004, we had 2,563 temporary employees in our Spanish offices.
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E. Share Ownership
As of June 30, 2005, the members of the Board of Directors owned an aggregate of 38,065,123 BBVA shares as shown in the table below:
Francisco González Rodríguez
José Ignacio Goirigolzarri Tellaeche
Juan Carlos Álvarez Mezquiriz
Richard C. Breeden
Ramón Bustamante y de la Mora
José Antonio Fernández Rivero
Ignacio Ferrero Jordi
Román Knörr Borrás
Ricardo Lacasa Suárez
Carlos Loring Martínez De Irujo
José Maldonado Ramos
Enrique Medina Fernández
Susana Rodríguez Vidarte
José María San Martín Espinós
Teléfonica de España, S.A.
No member of the Board of Directors, held options over BBVA’s shares as of June 30, 2005.
As of February 28, 2005, the executive officers (excluding executive directors) and their families owned 4,565,712 shares. None of our executive officers holds 1% or more of BBVA’s shares. As part of our variable compensation program for our non-executive directors, we have established an annual grant of BBVA shares to such directors equal in value to approximately 10% of their regular annual bonus. Shares granted to non-executive directors are acquired by BBVA at market prices and are freely transferable by such directors one year after receiving them. BBVA granted 412,701 of its shares under this program in the year ended December 31, 2004.
As a general policy, we do not extend credit to employees or third parties for the purpose of acquiring BBVA’s shares.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
As of March 31, 2005, no shareholder beneficially held more than five percent of BBVA’s shares. To our knowledge, no other person, corporation or government owned beneficially, directly or indirectly, five percent or more of BBVA’s shares. BBVA’s major shareholders do not have voting rights which are different from those held by the rest of its shareholders. To the extent known to us, BBVA is not controlled, directly or indirectly, by any other corporation, government or any other natural or legal person. As of March 31, 2005, there were 1,060,537 holders of BBVA’s shares, with a total of 851,257,414 shares held by 73 shareholders with registered addresses in the United States. Since certain of such shares and ADRs are held by nominees, the foregoing figures are not representative of the number of beneficial holders. BBVA’s directors and executive officers did not own any ADRs as of December 31, 2004.
B. Related Party Transactions
Loans to Directors, Executive Officers and Related Parties
The total of advance payments and personal loans granted by BBVA and its consolidated subsidiaries to the members of the Board of Directors and outstanding as of December 31, 2004 amounted to €128,000 at interest rates of between 4% and 5%, of which €92,000 was granted to executive directors and €36,000 to independent directors. As of December 31, 2004, no guarantees had been extended to secure members of the Board of Directors’ obligations or commitments.
For additional discussion regarding loans to directors, executive officers and related parties, see Note 8 and Note 27 to the Consolidated Financial Statements.
Uno-e Bank Agreement
On May 15, 2002, BBVA entered into an agreement with Terra Networks, which is majority-owned by Telefónica, for the integration of Uno-e Bank and the individuals consumer financing business of Finanzia, whereby Terra Networks’ holding in Uno-e Bank would decrease to 33%. This integration transaction and the percentage of ownership held by Terra Networks were formally executed on January 10, 2003, and approved at extraordinary shareholders’ meetings of Finanzia and Uno-e Bank held on April 23, 2003. Terra Networks has the right to sell its stake to BBVA between April 1, 2005 and September 30, 2007. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Agreement with Terra Networks”.
Related Party Transactions in the Ordinary Course of Business
Loans extended to related parties were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or present other unfavorable features.
BBVA subsidiaries engage, on a regular and routine basis, in a number of customary transactions with other BBVA subsidiaries, including:
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and other similar transactions within the scope of the ordinary course of the banking business, such as loans and other banking services to BBVA’s directors, shareholders, to employees of all levels, to the associates and family members of all the above and to other BBVA non-banking subsidiaries or affiliates. All these transactions have been made:
C. Interests of Experts and Counsel
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
Financial Information
See Item 18.
The table below sets forth the amount of interim, final and total dividends paid by BBVA on its shares for the years 2000 to 2004, adjusted to reflect all stock splits. Dollar amounts have been converted from euro at the Noon Buying Rate at the end of the relevant year.
BBVA has paid annual dividends to its shareholders since the date it was founded. Historically, BBVA has paid interim dividends each year. The total dividend for a year is proposed by the Board of Directors following the end of the year to which it relates. The unpaid portion of this dividend (the final dividend) is paid after the approval of our financial statements by the shareholders at the General Shareholder’s Meeting. Interim and final dividends are payable to holders of record on the dividend payment date. Unclaimed dividends revert to BBVA five years after declaration.
While BBVA expects to declare and pay dividends on its shares on a quarterly basis in the future, the payment of dividends will depend upon its earnings, financial condition, governmental regulations and policies and other factors.
Holders of ADRs are entitled to receive dividends attributable to the shares represented by the ADSs evidenced by their ADRs to the same extent as if they were holders of such shares.
For a description of BBVA’s access to the funds necessary to pay dividends on the shares, see “Item 4. Information on the Company—Supervision and Regulation—Dividends”. In addition, BBVA may not pay dividends except out of its unrestricted reserves available for the payment of dividends, after taking into account the Bank of Spain’s capital adequacy requirements. Capital adequacy requirements are applied by the Bank of Spain on both a consolidated and individual basis. See “Item 4. Information on the Company—Supervision and Regulation—Capital Adequacy Requirements” and “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital”. Under Spain’s capital adequacy requirements, we estimate that as of December 31, 2004, BBVA had approximately €4.5 billion of reserves in excess of applicable capital and reserve requirements, which were not restricted as to the payment of dividends.
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Legal Proceedings
On March 15, 2002, the Bank of Spain announced that it was opening an administrative proceeding against BBVA and certain individuals who have served as members of BBVA’s board of directors or as executive officers. This announcement was the result of BBVA’s voluntary disclosure to the Bank of Spain on January 19, 2001 that BBVA funds then amounting to approximately Ptas. 37,427 million (approximately €225 million) had been held in offshore accounts and not been reflected in its financial statements. These funds had been generated largely as a result of capital gains realized on transactions in BBV and Argentaria shares and were included in our financial statements in 2000. See Note 32.2.B.15 to our consolidated financial statements included in our Annual Report on Form 20-F for 2002. The Bank of Spain subsequently conducted a confidential investigation which led to the commencement of its administrative proceeding. The Bank of Spain’s administrative proceeding was suspended upon commencement of the proceeding initiated by the National Criminal Court (discussed below) and has remained suspended pending completion of such proceeding.
At the time the Bank of Spain proceeding was suspended, no formal charges had been made by the Bank of Spain relating to the facts and events under investigation. BBVA is therefore unable to determine what, if any, charges will be made by the Bank of Spain and to what conduct any such charges may relate. However, based on BBVA’s assessment of the probable charges and penalties that could be imposed by the Bank of Spain and that since the initiation of the Bank of Spain proceeding, BBVA has continued to be engaged regularly in extending commercial and other types of credit and accepting demand and other types of deposits, BBVA believes that once the Bank of Spain proceeding is recommenced after the conclusion of the National Criminal Court’s proceeding, resolution of such proceeding would not have a material adverse effect on BBVA or its consolidated financial position or results of operations.
National Criminal Court (Audiencia Nacional)
On April 9, 2002, Tribunal No. 5 of Spain’s National Criminal Court presided by Judge Baltasar Garzón commenced a criminal proceeding regarding the previously unreported funds and suspended the administrative proceeding initiated by the Bank of Spain. The National Criminal Court proceeding was initially directed at 28 of BBVA’s former directors and executive officers and was subsequently split into two separate proceedings. One proceeding relates to the use of the unreported funds to create pension accounts. In this proceeding, three of our former directors and two former executive officers have been formally charged. The second proceeding, which generally relates to the unreported funds, is still in the investigation phase and is directed at four of our former directors and two former executive officers. None of these directors and executive officers continue to serve as directors on BBVA’s Board of Directors or are affiliated with BBVA in any other capacity. Under Spanish law, criminal liability may only be imposed on a corporation’s employees and members of its board of directors but not on the corporation itself. Consequently, BBVA does not have any criminal liability under Spanish law and none of its current officers or directors are party to this proceeding. BBVA is cooperating fully with the National Criminal Court proceeding, which commenced more than two years ago and is currently pending.
Spanish National Market Commission (the “CNMV”)
On May 22, 2002, the Spanish securities market regulator, the CNMV, instituted administrative proceedings against BBVA for alleged violations of the Spanish Securities Markets Act of 1988 in connection with the same events being investigated by the Bank of Spain. As with the Bank of Spain proceeding, the National Criminal Court requested that the CNMV suspend its proceedings until resolution of the National Criminal Court’s criminal proceeding described above. The CNMV proceeding was suspended on January 7, 2003 and has remained suspended pending completion of the proceeding initiated by the National Criminal Court.
Based on BBVA’s assessment of the probable charges and penalties that could be imposed by the CNMV, and the fact that since the initiation of the CNMV proceeding the CNMV has not restricted BBVA from continuing to be actively involved in capital markets transactions in Spain, including by conducting offerings of its own debt and equity securities, BBVA believes that once the CNMV proceeding is recommenced after the conclusion of the National Criminal Court’s proceeding, resolution of such proceeding would not have a material adverse effect on BBVA or its consolidated financial position or results of operations.
Internal Control Procedures
As a result of our discovery that BBVA funds had been held in offshore accounts and not been reflected in its financial statements, we have implemented several accounting internal control procedures in order to obtain reasonable assurance that breaches of our internal controls do not occur. For example, BBVA has significantly strengthened its internal audit function. BBVA’s internal audit department is responsible for such matters as verifying accuracy and completeness of BBVA’s financial reporting and ensuring the compliance, appropriateness and effectiveness of BBVA’s internal control systems and procedures. BBVA has also enhanced its
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internal audit function, including by broadening the scope of its internal audit activities to include all of BBVA’s diverse operations, both in terms of business area and geographical location. In addition, in 2002, BBVA implemented a “Directors Plan” in respect of fiscal years 2003 and 2004 to further strengthen its internal controls. As part of this plan, BBVA’s internal audit function was further expanded to include review of information and documentation used by the management of each business unit, review of BBVA’s financial statement consolidation process and review and assessment of BBVA’s compliance with capital adequacy requirements. In addition, the Directors Plan provides for the standardization of internal audit work procedures, from making initial contact with the business area or unit being audited to documenting the results of the audit.
BBVA has also reinforced its internal compliance department. This department, whose functions have been established by the Audit and Compliance Committee of BBVA’s Board of Directors, is responsible for developing and implementing internal norms and procedures to ensure compliance with legal requirements and ethical guidelines established by BBVA, such as BBVA’s Code of Conduct. For example, this department is responsible for establishing internal controls and procedures related to matters such as the prevention of money-laundering and trading in BBVA’s securities.
Besides the accounting internal control procedures implemented by BBVA described above, in order to further obtain reasonable assurance that breaches of BBVA’s internal controls do not occur, BBVA has taken a series of steps to strengthen its corporate governance structures in keeping with the most recent trends in this area and new legislation that has taken effect in Spain and the other countries in which BBVA operates. For a description of these corporate governance structures, see “Item 6—Directors, Senior Management and Employees”.
Other Proceedings
Two proceedings, which were described in our 2001 Annual Report on Form 20-F, were initiated in Spain based on the testimony of a former BBV Puerto Rico employee. These proceedings included allegations of money laundering and bribery against BBVA and certain of its employees. To date, however, no person has been charged with any wrongdoing or named as a defendant in connection with these proceedings.
BBVA Privanza Bank Ltd. (Jersey)
A proceeding was initiating alleging that certain employees of BBVA Privanza Bank Ltd. (Jersey) cooperated in the creation of accounts and financial products in Jersey which were allegedly used by Spanish individuals to avoid Spanish tax obligations. The proceedings also included an allegation of a tax offence due to the purported non-consolidation of a fully-owned subsidiary. This proceedings is ongoing and charges have not been brought against any BBVA employee or director.
In light of the surrounding events and circumstances, our legal advisers do not expect that the proceedings described above will have a material effect on us.
B. Significant Changes
On December 22, the Bank of Spain issued Circular 4/2004 on Public and Restricted Financial Reporting Standards and Model Financial Statements, which sets for new accounting rules applicable to Spanish banks based on IFRS.
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ITEM 9. THE OFFER AND LISTING
BBVA’s shares are listed on the Spanish Stock Exchanges in Madrid, Bilbao, Barcelona and Valencia and quoted on the Automated Quotation System of the Spanish Stock Exchanges (the “Automated Quotation System”). They are also listed on the Frankfurt, Milan, Zurich, London, Lima and New York Stock Exchanges, and quoted on SEAQ International in London. Each ADS represents one share.
Fluctuations in the exchange rate between the euro and the dollar will affect the dollar equivalent of the euro price of BBVA’s shares on the Spanish Stock Exchanges and the price of BBVA’s ADSs on the New York Stock Exchange. Cash dividends are paid by BBVA in euro, and exchange rate fluctuations between the euro and the dollar will affect the dollar amounts received by holders of American Depositary Receipts (“ADRs”) on conversion by The Bank of New York (acting as depositary) of cash dividends on the shares underlying the ADSs evidenced by such ADRs.
The table below sets forth, for the periods indicated, the high and low sales closing prices for the shares of BBV until January 28, 2000 and BBVA thereafter on the Automated Quotation System.
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Fiscal year ended December 31, 2000
Annual
Fiscal year ended December 31, 2001
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal year ended December 31, 2002
Fiscal year ended December 31, 2003
Month ended December 31, 2003
Fiscal year ended December 31, 2004
Month ended December 31, 2004
Fiscal year ended December 31, 2005
Month ended January 31, 2005
Month ended February 29, 2005
Month ended March 31, 2005
Month ended April 30, 2005
Month ended May 31, 2005
Month ended June 30, 2005 (through June 29)
From January 2004 through December 31, 2004 the percentage of outstanding shares held by BBVA and its affiliates ranged between 0.084% and 0.594% respectively, calculated on a monthly basis. On May 12, 2005, the percentage of outstanding shares held by BBVA and its affiliates was 0.549%.
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The table below sets forth the reported high and low sales closing prices for the ADSs of BBV until January 28, 2000 and BBVA thereafter on the New York Stock Exchange for the periods indicated.
Securities Trading in Spain
The Spanish securities market for equity securities consists of the Automated Quotation System and the four stock exchanges located in Madrid, Bilbao, Barcelona and Valencia. During 2004, the Automated Quotation System accounted for the majority of the total trading volume of equity securities on the Spanish stock exchanges.
Automated Quotation System. The Automated Quotation System links the four local exchanges, providing those securities listed on it with a uniform continuous market that eliminates certain of the differences among the local exchanges. The principal feature of the system is the computerized matching of buy and sell orders at the time of entry of the order. Each order is executed as soon as a matching order is entered, but can be modified or canceled until executed. The activity of the market can be continuously monitored by investors and brokers. The Automated Quotation System is operated and regulated by Sociedad de Bolsas, S.A. (“Sociedad de Bolsas”), a corporation owned by the companies that manage the local exchanges. All trades on the Automated Quotation System must be placed through a bank, brokerage firm, an official stock broker or a dealer firm member of a Spanish stock exchange directly. Since January 1, 2000, Spanish banks have been allowed to place trades on the Automated Quotation System and have been allowed to become members of the Spanish stock exchanges.
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In a pre-opening session held from 8:30 a.m. to 9:00 a.m. each trading day, an opening price is established for each security traded on the Automated Quotation System based on orders placed at that time. The legal regime concerning opening prices was changed by an internal rule issued by the Sociedad de Bolsas. The new legal regime sets forth that all references to maximum changes in share prices will be substituted by a definition of prices and creation of static and dynamic ranks for each listed share to be published on a periodic basis by the Sociedad de Bolsas. The computerized trading hours are from 9:00 a.m. to 5:30 p.m., during which time the trading price of a security is permitted to vary by up to the stated level. If the quoted price exceeds this limit, trading in the security is suspended until the next day. Between 5:30 p.m. and 5:35 p.m. a closing price is established for each security through an auction system similar to the one held for the pre-opening early in the morning.
Between 5:30 p.m. and 8:00 p.m., trades may occur outside the computerized matching system without prior authorization of the Sociedad de Bolsas at a price within the range of 5% above the higher of the average price and closing price for the day and 5% below the lower of the average price and closing price for the day, if, among other things, the trade involves more than €300,000 and more than 20% of the average daily trading volume of the stock during the preceding three months. At any time trades may take place (with the prior authorization of the Sociedad de Bolsas) at any price if:
Information with respect to the computerized trades between 9:00 a.m. and 5:30 p.m. is made public immediately, and information with respect to trades outside the computerized matching system is reported to the Sociedad de Bolsas by the end of the trading day and published in the Boletín de Cotización and in the computer system by the beginning of the next trading day.
Clearance and Settlement System. Law 44/2002 and Rule 689/2003 of March 27, 2003 approved by the Spanish Ministry of Economy have promoted the integration of the two main existing book entry settlement systems existing in Spain, the non-gilts settlement system Servicio de Compensación y Liquidación de Valores (“SCLV”) and the gilts settlement system Central de Anotaciones en Cuenta, into one system to be known as Sociedad de Gestion de los Sistemas de Registro Compensación y Liquidación de Valores (the “Iberclear”).
Notwithstanding the above, rules concerning book entry settlement system enacted before this amendment by the SCLV and the Bank of Spain are still in force, but any reference to the SCLV must be substituted by Iberclear.
Under this new regulation, transactions carried out on the Spanish stock exchanges are cleared and settled through Iberclear. Only members of Iberclear are entitled to use it, and membership is restricted to authorized members of the Spanish stock exchanges, the Bank of Spain (when an agreement, approved by the Spanish Ministry of Economy and Finance, is reached with Iberclear) and, with the approval of the CNMV, other brokers not members of the Spanish stock exchanges, banks, savings banks and foreign settlement and clearance systems. Iberclear is owned by its members (excluding, if applicable, the Bank of Spain) and by the companies which manage the local exchanges. The clearance and settlement system and its members are responsible for maintaining records of purchases and sales under the book-entry system. Shares of listed Spanish companies are held in book-entry form. Iberclear, which manages the clearance and settlement system, maintains a registry reflecting the number of shares held by each of its member entities (each an entidad participada), as well as the amount of such shares held on behalf of beneficial owners. Each member entity, in turn, maintains a registry of the owners of such shares. Spanish law considers the legal owner of the shares to be:
The SCLV has introduced the so-called “D+3 Settlement System” by which the settlement of any transactions must be made three working days following the date on which the transaction was carried out.
Obtaining legal title to shares of a company listed on a Spanish stock exchange requires the participation of a Spanish official stockbroker, broker-dealer, bank or other entity authorized under Spanish law to record the transfer of shares. To evidence title to shares, at the owner’s request the relevant member entity must issue a certificate of ownership. In the event the owner is a member entity, Iberclear is in charge of the issuance of the certificate with respect to the shares held in the member entity’s name.
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Brokerage commissions are not regulated. Brokers’ fees, to the extent charged, will apply upon transfer of title of our shares from the depositary to a holder of ADRs, and upon any later sale of such shares by such holder. Transfers of ADSs do not require the participation of an official stockbroker. The deposit agreement provides that holders depositing our shares with the depositary in exchange for ADSs or withdrawing our shares in exchange for ADSs will pay the fees of the official stockbroker or other person or entity authorized under Spanish law applicable both to such holder and to the depositary.
Securities Market Legislation
The Securities Markets Act was enacted in 1988 with the purpose of reforming the organization and supervision of the Spanish securities markets. This legislation and the regulation implementing it:
On February 14, 1992, Royal Decree No. 116/92 established the clearance and settlement system and the book-entry system, and required that all companies listed on a Spanish stock exchange adopt the book-entry system.
On November 16, 1998, the Securities Markets Act was amended in order to adapt it to Directive 93/22/CEE on investment services (later amended by Directive 95/26/CE and Directive 97/9/CE of the European Parliament and Council on investors indemnity systems).
On November 22, 2002, the Securities Markets Act was amended by Law 44/2002 in order to update Spanish financial law to global financial markets. See “Item 4. Information on the Company—Business Overview—Law Reforming the Spanish Financial System”.
On June 18, 2003, the Spanish Government approved the Ley de Transparencia (“Law 26/2003”), modifying both the Securities Markets Act and the Corporate Law, to reinforce the transparency of information available regarding listed Spanish companies. This law adds a new chapter, Title X, to the Securities Markets Act, which (i) requires disclosure of shareholder agreements relating to listed companies; (ii) regulates the operation of the general shareholders’ meetings and of boards of directors of listed companies; (iii) requires the publication of an annual report on corporate governance and (iv) establishes measures designed to increase the availability of information to shareholders.
Trading by the Bank and its Affiliates in the Shares
Trading by subsidiaries in their parent companies’ shares is restricted by the Spanish Companies Act.
Neither BBVA nor its affiliates may purchase BBVA’s shares unless the making of such purchases is authorized at a meeting of BBVA’s shareholders by means of a resolution establishing, among other matters, the maximum number of shares to be acquired within a maximum period of 18 months. Restricted reserves equal to the purchase price of any shares that are purchased by BBVA or its subsidiaries must be made by the purchasing entity. The total number of shares held by BBVA and its subsidiaries may not exceed five percent of BBVA’s total capital. It is the practice of Spanish banking groups, including ours, to establish subsidiaries to trade in their parent company’s shares in order to meet imbalances of supply and demand, to provide liquidity (especially for trades by their customers) and to modulate swings in the market price of their parent company’s shares.
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Reporting Requirements
Any entity which transfers five percent, or any multiple of five percent, of the capital stock of a company listed on a Spanish stock exchange must, within seven days after that transfer, report the transfer to such company, to the stock exchange on which such company is listed and to the CNMV. In addition, any company listed on a Spanish stock exchange must report on a non-public basis any acquisition by such company (or an affiliate) of the company’s own shares if such acquisition, together with any previous one from the date of the last communication, exceeds 1% of its capital stock, regardless of the balance retained. Members of the Board of Directors must report any transfer or acquisition of share capital of a company listed on the Spanish stock exchanges, regardless of the size of the transaction. Additionally, since we are a credit entity, any individual or company which intends to acquire a significant participation in BBVA’s share capital must obtain prior approval from the Bank of Spain in order to carry out the transaction. See “Item 10. Additional Information—Restrictions on Acquisitions of Shares”.
Royal Decree 2590/98 has amended Royal Decree 377/91 by incorporating new reporting requirements in connection with any entity acting from a tax haven or a country where no securities regulatory commission exists, in which case the threshold of five percent is reduced to one percent. Furthermore, Royal Decree 2590/98 has extended the meaning of “transfer” to include voting agreements between shareholders.
Each Spanish bank is required to provide to the Bank of Spain a list dated the last day of each quarter of all the bank’s shareholders that are financial institutions and other non-financial institution shareholders owning at least 0.25% of a bank’s total share capital. Furthermore, the banks are required to inform the Bank of Spain, as soon as they become aware, and in any case not later than in 15 days, of each acquisition by a person or a group of at least one percent of such bank’s total share capital.
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ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
B. Memorandum and Articles of Association
Spanish law and BBVA’s bylaws are the main sources of regulation affecting the company. All rights and obligations of BBVA’s shareholders are contained in its bylaws and in Spanish law.
On March 1, 2003, BBVA’s shareholders adopted a resolution amending its bylaws. The amendments were to: (i) Article 31 in order to cease limiting the exercise of shareholders’ voting rights to 10% of BBVA’s total share capital; (ii) Article 34 in order to change the maximum and minimum number of seats on the Board of Directors to 18 and 9, respectively and (iii) Article 48 in order to comply with Law 44/2002.
On February 28, 2004, BBVA’s shareholders adopted a resolution amending its bylaws. The amendments are to: (i) Article 24 in order to expand shareholders’ rights to participate in shareholders’ meetings by proxy or representative; (ii) Article 29 in order to enhance shareholders’ ability to obtain information regarding the Company; (iii) Article 31 regarding the procedures for the adoption of shareholder resolutions; (iv) Article 35 regarding the requirements for being a director; (v) Article 38 regarding the chairman and secretary of the Board of Directors; (vi) Article 45 regarding nomination and composition of the Board of Directors; (vii) Article 37 to make a technical amendment required by virtue of the amendment to Article 35 and (viii) Article 34 to reduce the maximum number of directors from 18 to 16.
Registry and Company’s Objects and Purposes
BBVA is registered with the Commercial Registry of Vizcaya (Spain). Its registration number at the Commercial Registry of Vizcaya is volume 2,083, book 1,545, section 3, folio 1, page 14,741. Its corporate objects and purposes are to: (i) directly or indirectly conduct all types of activities, transactions, acts, agreements and services relating to the banking business which are permitted or not prohibited by law and all banking ancillary activities; (ii) acquire, hold and dispose of securities and (iii) make public offers for the acquisition and sale of securities and all types of holdings in any kind of company. BBVA’s objects and purposes are contained in Article 3 of the bylaws.
Certain Powers of the Board of Directors
In general, provisions limiting the powers of BBVA’s directors are not contained in its bylaws. Such limitations, where they exist, often (i) limit a director’s power to vote on a proposal, arrangement or contract in which the director is materially interested; (ii) limit the power to vote compensation to themselves; (iii) limit borrowing powers exercisable by the directors and how such borrowing powers can be varied or (iv) require retirement of directors at a certain age. The powers of BBVA’s directors in these and other matters, however, are limited by and subject to BBVA’s internal regulations. In addition, BBVA’s Board of Directors is subject to the Regulations of the Board of Directors, which contains a series of ethical standards. See “Item 6. Directors, Senior Management and Employees”.
The provisions of BBVA’s bylaws that relate to compensation of directors are in strict accordance with the relevant provisions of Spanish law. The main provisions of the bylaws that relate to these matters are those that, in accordance with applicable Spanish law, allow the members of the Board of Directors to determine their administrative expenses or agree on such additional benefits they consider appropriate or necessary, up to four percent of our paid-up capital per year, which may only be paid after the minimum yearly dividend of four percent of the paid-in capital has been paid to our shareholders.
As of the date of the filing of this Annual Report, 10 of the 15 members of the Board of Directors were independent.
Members of the Board of Directors are elected for a term in office of five years. One-fifth of the Board of Directors is re-elected annually. The members of the Board of Directors may be re-elected for an unlimited number of terms.
Certain Provisions Regarding Preferred Shares
The bylaws authorize BBVA to issue ordinary, non-voting, redeemable and preferred shares. As of the date of the filing of this Annual Report, BBVA has no non-voting, redeemable or preferred shares outstanding.
The characteristics of preferred shares must be agreed by the Board of Directors before they are issued.
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Only shares that have been issued as redeemable may be redeemed by BBVA. Redemption of shares may only occur according to the terms set forth when they are issued. Redeemable shares must be fully paid-up at the time of their subscription. If the right to redeem redeemable shares is exclusively given to BBVA, it may not be exercised until at least three years after the issue. Redemption of shares must be financed against profits, free reserves or the proceeds of new securities issued especially for financing the redemption of an issue. If financed against profits or free reserves, BBVA must create a reserve for the amount of the par value of the redeemed shares. If the redemption is not financed against profits, free reserves or a new issue, it may only be done in compliance with the requirements of a reduction in share capital by the refund of contributions.
Holders of non-voting shares, if issued, are entitled to a minimum annual dividend, fixed or variable, set out at the time of the issue. The right of non-voting shares to accumulate unpaid dividends whenever funds to pay dividends are not available, any preemptive rights associated with non-voting shares, and the ability of holders of non-voting shares to recover voting rights also must be established at the time of the issue. Non-voting shares are entitled to the dividends to which ordinary shares are entitled in addition to their minimum dividend.
Certain Provisions Regarding Shareholders Rights
As of the date of the filing of this Annual Report, BBVA’s capital is comprised of one class of ordinary shares, all of which have the same rights.
Once all legal reserves and funds have been provided for out of the net profits of any given fiscal year, shareholders have the right to the distribution of an annual dividend of at least four percent of our paid-in capital. Shareholders will participate in the distribution of dividends in proportion to their paid-in capital. The right to collect a dividend lapses after five years as of the date in which it was first available to the shareholders. Shareholders also have the right to participate in proportion to their paid-in capital in any distribution resulting from our liquidation.
Each shareholder present at a General Shareholders’ Meeting is entitled to one vote per each share. However, unpaid shares with respect to which a shareholder is in default of the resolutions of the Board of Directors relating to their payment will not be entitled to vote. The bylaws contain no provisions regarding cumulative voting.
On March 1, 2003, BBVA’s shareholders passed a resolution amending the bylaws to, among other things, remove the provision which stated that no shareholder may cast a number of votes greater than those corresponding to shares representing 10% of BBVA’s share capital.
The bylaws do not contain any provisions relating to sinking funds or potential liability of shareholders to further capital calls by BBVA.
The bylaws do not specify what actions or quorums are required to change the rights of shareholders. Under Spanish law, the rights of shareholders may only be changed by an amendment to the bylaws that complies with the requirements explained below under “Shareholders’ Meetings”, plus the affirmative vote of the majority of the shares of the class that will be affected by the amendment.
Shareholders’ Meetings
General meetings may be ordinary or extraordinary. Ordinary general meetings are held within the first six months of each financial year in order to review, among other things, the management of the company, and to approve, if applicable, annual financial statements for the previous fiscal year. Extraordinary general meetings are those meetings that are not ordinary. In any case, the requirements mentioned below for constitution and adoption of resolutions are applicable to both categories of general meetings.
General meetings must be convoked by the Board of Directors, whether by their own decision or upon the request of shareholders holding at least five percent of BBVA’s share capital. General meetings must generally be advertised at least 15 days in advance in the Official Companies Registry Gazette (Boletín Oficial del Registro Mercantile) (Borme) and in a widely-circulated newspaper.
As of the date of the filing of this Annual Report, shareholders have the right to attend general meetings if they:
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Additionally, holders of fewer than 500 shares may aggregate their shares to reach at least such number of shares and appoint a shareholder as proxy to attend the general meeting.
General meetings will be validly constituted on first call with the presence of at least 25% of BBVA’s voting capital, either in person or by proxy. No minimum quorum is required to hold a general meeting on second call. In either case, resolutions will be agreed by the majority of the votes. However, a general meeting will only be validly held with the presence of 50% of BBVA’s voting capital on first call or of 25% of the voting capital on second call, in the case of resolutions concerning the following matters:
In these cases, resolutions may only be approved by the vote of the majority of the shares if at least 50% of the voting capital is present at the meeting. If the voting capital present at the meeting is less than 50%, then resolutions may only be adopted by two-thirds of the shares present.
Additionally, our bylaws state that, in order to adopt resolutions regarding a change in corporate purpose or the total liquidation or dissolution of BBVA, at least two-thirds of the voting capital must be present at the meeting on first call and at least 60 percent of voting capital must be present on second call.
Restrictions on the Ownership of Shares
Our bylaws do not provide for any restrictions on the ownership of our ordinary shares. Spanish law, however, provides for certain restrictions which are described below under “—Exchange Controls—Restrictions on Acquisitions of Shares”.
Restrictions on Foreign Investments
Spanish stock exchanges are open to foreign investors. However, the acquisition of 50% or more of the share capital of a Spanish company by a person or entity residing in a tax haven must in certain cases be notified to the Ministry of Economy and Treasury prior to its execution. All other investments in BBVA’s shares by foreign entities or individuals only require the notification of the Spanish authorities through the Spanish intermediary that took part in the investment once it is executed.
Current Spanish regulations provide that once all applicable taxes have been paid, foreign investors may freely transfer out of Spain any amounts of invested capital, capital gains and dividends.
See “—Exchange Controls”.
Change of Control Provisions
In addition to the restrictions on acquisitions of BBVA’s shares discussed above, certain antitrust freeze-out regulations may also delay, defer or prevent a change of control of BBVA or any of its subsidiaries in the event of a merger, acquisition or corporate restructuring. In Spain, the application of both Spanish and European antitrust regulations require that prior notice of domestic or cross-border merger transactions be given in order to obtain a “non-opposition” ruling from antitrust authorities.
Spanish regulation of takeover bids may also delay, defer or prevent a change of control of BBVA or any of its subsidiaries in the event of a merger, acquisition or corporate restructuring. Spanish regulation of takeover bids contained in Royal Decree 1197/1991 was as amended by Royal Decree 432/2003 dated April 11, 2003. See “—Exchange Controls—Tender Offers”. Regulations on public takeover bids require a bid to be launched if the acquisition of the listed company grants control to the purchaser, regardless of whether the acquired stake reaches the 25% threshold. The new rules state that it is necessary to launch a tender offer if the bidder intends to acquire less than 25% of the target’s share capital but intends to appoint more than one-third and less than one-half plus one of the target’s directors.
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Since BBVA is a credit entity, it is necessary to obtain approval from the Bank of Spain in order to acquire a number of shares considered to be a significant participation by Law 26/1988, of July 29, 1998. See “—Exchange Controls—Restrictions on Acquisitions of Shares”. Also, any agreement that contemplates BBVA’s merger with another credit entity will require the authorization of the Ministry of Economy. This could also delay, defer or prevent a change of control of BBVA or any of its subsidiaries that are credit entities in the event of a merger.
C. Material Contracts
During the past two years BBVA was not a party to any contract outside its ordinary course of business that was material to it as a whole.
D. Exchange Controls
In 1991, Spain adopted the EU standards for free movement of capital and services. As a result, exchange controls and restrictions on foreign investments have generally been abolished and foreign investors may transfer invested capital, capital gains and dividends out of Spain without limitation as to amount, subject to applicable taxes. See “—Taxation”.
Pursuant to Spanish Law 18/1992 on Foreign Investments (Ley 18/1992, de 1 de julio) and Royal Decree 664/1999 (Real Decreto 664/1999, de 23 de abril), foreign investors may freely invest in shares of Spanish companies, except in the case of certain strategic industries.
Shares in Spanish companies held by foreign investors must be reported to the Spanish Registry of Foreign Investments by the depositary bank or relevant Iberclear member. When a foreign investor acquires shares that are subject to the reporting requirements of the CNMV, notice must be given by the foreign investor directly to the Registry of Foreign Investments in addition to the notices of majority interests that must be sent to the CNMV and the applicable stock exchanges. This notice must be given through a bank or other financial institution duly registered with the Bank of Spain and the CNMV or through bank accounts opened with any branch of such registered entities.
Investment by foreigners domiciled in enumerated tax haven jurisdictions is subject to special reporting requirements under Royal Decree 1080/1997 (Real Decreto 1980/1997, de 5 de julio).
On July 5, 2003, Law 19/2003 (Ley sobre el regimen juridico de los movimientos de capitales y de las transacciones economicas con el exterior y sobre determinadas medidas de prevencion del blanqueo de capitales), came into effect. This law is an update to other Spanish exchange control and money laundering prevention laws.
Restrictions on Acquisitions of Shares
Spanish law provides that any individual or corporation that intends to acquire, directly or indirectly, a significant participation (participación significativa) in a Spanish bank must obtain the prior approval of the Bank of Spain, including the amount of such participation, the terms and conditions of the acquisition and the period in which it is intended to execute the transaction. A significant participation is considered five percent of the outstanding share capital of a bank or a lower percentage if such holding allows for the exercise of a significant influence.
Any individual or company that intends to increase, directly or indirectly, its significant participation in such a way that its share capital or voting rights after the acquisition reaches or exceeds 10%, 15%, 20%, 25%, 33%, 40%, 50%, 66% or 75% is required to give prior notice to the Bank of Spain of such transaction. Any acquisition without such prior notification, or before three months have elapsed after the date of such notification, or against the objection of the Bank of Spain, will produce the following results:
The Bank of Spain has a period of three months to object to a proposed transaction. Such objection may be based on the fact that the Bank of Spain does not consider the acquiring person suitable to guarantee the sound and prudent operation of the target bank.
Any individual or institution that intends to sell its significant participation or reduce the above mentioned percentages, or which, because of such sale, loses control of the entity, must give prior notice to the Bank of Spain, indicating the amount to be sold and the period in which the transaction is to be executed. Non-compliance with this requirement will result in sanctions.
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The Ministry of Economy and the Treasury, following a proposal by the Bank of Spain, may, whenever the control by a person with a significant participation may jeopardize the sound and prudent management of a credit institution, adopt any of the following measures as deemed appropriate:
Tender Offers
As stated above, the Spanish legal regime concerning takeover bids was amended by Royal Decree 432/2003 of April 11, 2003, in order to introduce more cases in which it is necessary to launch a takeover in order to acquire a stake of the share capital of a listed company. Subject to certain exceptions, any individual or corporation proposing to acquire shares of a company’s share capital (or other securities that may directly or indirectly give the right to subscribe for such shares), which is fully or partly admitted for trading on a Spanish stock exchange, may not do so without first launching a public tender offer on the terms and conditions laid down in the Royal Decree, if it intends to appoint more than one-third but less than one-half of the directors of the target company.
E. Taxation
Spanish Tax Considerations
The following is a summary of the material Spanish tax consequences to U.S. Residents (as defined below) of the acquisition, ownership and disposition of BBVA’s ADSs or ordinary shares. This summary does not address all tax considerations that may be relevant to all categories of potential purchasers, some of whom (such as life insurance companies, tax-exempt entities, dealers in securities or financial institutions) may be subject to special rules. In particular, the summary deals only with the U.S. Holders (as defined below) that will hold ADSs or ordinary shares as capital assets and who do not at any time own individually, nor are treated as owning, 25% or more of BBVA’s shares, including ADSs.
As used in this particular section, the following terms have the following meanings:
(1) “U.S. Holder” means a beneficial owner of BBVA’s ADSs or ordinary shares that is:
(2) “Treaty” means the Convention between the United States and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, together with a related Protocol.
(3) “U.S. Resident” means a U.S. Holder that is a resident of the United States for the purposes of the Treaty and entitled to the benefits of the Treaty, whose holding is not effectively connected with (1) a permanent establishment in Spain through which such holder carries on or has carried on business, or (2) a fixed base in Spain from which such holder performs or has performed independent personal services.
Holders of ADSs or ordinary shares who are not U.S. Residents should also consult their tax advisors, particularly as to the applicability of any tax treaty. The statements regarding Spanish tax laws set out below are based on interpretations of those laws in force as of the date of this Annual Report. Such statements also assume that each obligation in the Deposit Agreement and any related agreement will be performed in full accordance with the terms of those agreements.
Taxation of Dividends
Under Spanish law, dividends paid by BBVA to a holder of ordinary shares or ADSs who is not resident in Spain for tax purposes and does not operate through a permanent establishment in Spain, are subject to Spanish Non-Resident Income Tax, withheld at source, currently at a 15% tax rate. For these purposes, upon distribution of the dividend, BBVA or its paying agent will withhold an amount equal to the tax due according to the rules set forth above (i.e., applying the general withholding tax rate of 15%), transferring the resulting net amount to the depositary. Under the Treaty, if you are a U.S. Resident, you are also entitled to a tax rate of 15%.
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Taxation of Rights
Distribution of preemptive rights to subscribe for new shares made with respect to your shares in BBVA will not be treated as income under Spanish law and, therefore, will not be subject to Spanish Non-Resident Income Tax. The exercise of such preemptive rights is not considered a taxable event under Spanish law and thus is not subject to Spanish tax. Capital gains derived from the disposition of preemptive rights obtained by U.S. Residents are generally not taxed in Spain provided that certain conditions are met (See “—Taxation of Capital Gains” below).
Taxation of Capital Gains
Under Spanish law, any capital gains derived from securities issued by persons residing in Spain for tax purposes are considered to be Spanish source income and, therefore, are taxable in Spain. For Spanish tax purposes, income obtained by you, if you are a U.S. Resident, from the sale of BBVA’s ADSs or ordinary shares will be treated as capital gains. Spanish Non-Resident Income Tax is currently levied at a 35% tax rate on capital gains obtained by persons who are not residents of Spain for tax purposes, who are not entitled to the benefit of any applicable treaty for the avoidance of double taxation and who do not operate through a fixed base or a permanent establishment in Spain.
Notwithstanding the above, capital gains derived from the transfer of shares in an official Spanish secondary stock market by any holder who is resident in a country that has entered into a treaty for the avoidance of double taxation with an “exchange of information” clause (the Treaty contains currently such a clause) will be exempt from taxation in Spain. Additionally, capital gains realized by non-residents of Spain who are entitled to the benefit of an applicable treaty for the avoidance of the double taxation will, in the majority of cases, not be taxed in Spain (since most tax treaties provide for taxation only in the taxpayer’s country of residence). If you are a U.S. Resident, by virtue of the Treaty, capital gains arising from the disposition of ordinary shares or ADSs will not be taxed in Spain. You will be required to establish that you are entitled to this exemption by providing to the relevant Spanish tax authorities an IRS certificate of residence in the United States, together with the corresponding Spanish tax form.
Spanish Wealth Tax
If you do not reside in Spain and you hold shares located in Spain, you are subject to Spanish Wealth Tax (Spanish Law 19/1991), which imposes a tax on property located in Spain on the last day of any year. It is possible that the Spanish tax authorities may contend that all shares of a Spanish corporation and all ADSs representing such shares are located in Spain for Spanish tax purposes. If such a view were to prevail, and you are a non-resident of Spain who held BBVA’s ADSs or ordinary shares on the last day of any year, you would be subject to the Spanish Wealth Tax for such year at marginal rates varying between 0.2% and 2.5% of the average market value of such ordinary shares or ADSs during the last quarter of such year. U.S. Residents should consult their tax advisors with respect to the applicability of Spanish Wealth Tax.
Spanish Inheritance and Gift Taxes
Transfers of BBVA’s shares or ADRs upon death or by gift are subject to Spanish inheritance and gift taxes (Spanish Law 29/1987), if the transferee is a resident in Spain for tax purposes, or if BBVA’s shares or ADSs are located in Spain, regardless of the residence of the beneficiary. In this regard, the Spanish tax authorities may argue that all shares of a Spanish corporation and all ADSs representing such shares are located in Spain for Spanish tax purposes. The applicable tax rate, after applying all relevant factors, ranges between 7.65% and 81.6% for individuals, approximately.
Alternatively, corporations that are non-resident in Spain that receive BBVA’s shares or ADSs as a gift are subject to Spanish Non-Resident Income Tax at a 35% tax rate on the fair market value of such ordinary shares or ADSs as a capital gain. Hence, if the donee is a United States resident corporation, the exclusions available under the Treaty described in “—Taxation of Capital Gains” above will be applicable.
Spanish Transfer Tax
Transfers of BBVA’s ordinary shares or ADSs will be exempt from Transfer Tax (Impuesto sobre Transmisiones Patrimoniales) or Value-Added Tax. Additionally, no stamp duty will be levied on such transfers.
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U.S. Tax Considerations
The following summary describes the material U.S. federal income tax consequences of the acquisition, ownership and disposition of ADSs or ordinary shares, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire such securities. The summary applies only to U.S. Holders (as defined under “Spanish Tax Considerations” above) that hold ADSs or ordinary shares as capital assets for tax purposes and does not address all of the tax consequences that may be relevant to holders subject to special rules, such as:
The summary is based upon tax laws of the United States including the Internal Revenue Code of 1986, as amended to the date hereof (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as currently in effect. These laws are subject to change, possibly with retroactive effect. In addition, the summary is based on the Treaty (as defined under “Spanish Tax Considerations” above) and is based in part on representations of BBVA’s depositary and assumes that each obligation provided for in or otherwise contemplated by BBVA’s deposit agreement or any other related document will be performed in accordance with its terms. Prospective purchasers of the ADSs or ordinary shares are urged to consult their tax advisers as to the U.S., Spanish or other tax consequences of the purchase, ownership and disposition of ADSs or ordinary shares in their particular circumstances, including the effect of any U.S. state or local tax laws.
For United States federal income tax purposes, U.S. Holders of ADSs will generally be treated as the owners of the underlying ordinary shares represented by those ADSs. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying ordinary shares represented by those ADSs.
The U.S. Treasury has expressed concerns that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain noncorporate U.S. Holders, as described below. Accordingly, the analysis of the creditability of Spanish taxes described below, and the availability of the reduced tax rate for dividends received by certain noncorporate U.S. Holders, could be affected by future actions that may be taken by the parties to whom the ADSs are released.
This discussion assumes that BBVA was not a passive foreign investment company (“PFIC”) for 2004 (as discussed below).
Taxation of Distributions
To the extent paid out of our current or accumulated earnings and profits (as determined in accordance with U.S. federal income tax principles), distributions, before reduction for any Spanish income tax withheld by BBVA or its paying agent, made with respect to ADSs or ordinary shares (other than certain pro rata distributions of BBVA’s capital stock or rights to subscribe for shares of its capital stock) will be includible in the income of a U.S. Holder as ordinary dividend income. The amount of such dividends will be treated as foreign source dividend income and not be eligible for the “dividends received deduction” generally allowed to U.S. corporations under the Code. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, dividends paid to noncorporate U.S. Holders in taxable years beginning before January 1, 2009 will be taxable at a maximum tax rate of 15%. Noncorporate U.S. Holders should consult their own tax advisers to determine the implications of the rules regarding this favorable rate in their particular circumstances. To the extent that a distribution exceeds our current and accumulated earnings and profits, it will be treated as a nontaxable return of capital to the extent of the U.S. Holder’s tax basis in the ADSs or ordinary shares, and thereafter as capital gain.
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The amount of the distribution will equal the U.S. dollar value of the euro received, calculated by reference to the exchange rate in effect on the date such distribution is received (which, for U.S. Holders of ADSs, will be the date such distribution is received by the depositary), whether or not the depositary or U.S. Holder in fact converts any euro received into U.S. dollars at that time. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if such dividend is not converted into U.S. dollars on the date of its receipt.
Subject to applicable limitations that may vary depending upon a U.S. Holder’s circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, a U.S. Holder will be entitled to a credit against its U.S. federal income tax liability, or a deduction in computing its U.S. federal taxable income, for Spanish income taxes withheld by BBVA or its paying agent. A U.S. Holder must satisfy minimum holding period requirements in order to be eligible to claim a foreign tax credit for foreign taxes withheld on dividends. The rules governing foreign tax credits are complex and, therefore, U.S. Holders are urged to consult their tax advisers to determine whether they are subject to any special rules that limit their ability to make effective use of foreign tax credits.
Sale and Other Disposition of ADSs or Shares
Gain or loss realized by a U.S. Holder on (i) the sale or exchange of ADSs or ordinary shares or (ii) the depositary’s sale or exchange of ordinary shares received as distributions on the ADSs, will be subject to U.S. federal income tax as capital gain or loss in an amount equal to the difference between the U.S. Holder’s tax basis in the ADSs or ordinary shares and the amount realized on the disposition. Such gain or loss will be long-term capital gain or loss if the U.S. Holder held the ordinary shares or ADSs for more than one year. Gain or loss, if any, will generally be U.S. source for foreign tax credit purposes. The deductibility of capital losses is subject to limitations.
Passive Foreign Investment Company Rules
We believe that we were not a “passive foreign investment company”, or “PFIC”, for U.S. federal income tax purposes for the taxable year 2004. However, since our PFIC status depends upon the composition of our income and assets and the market value of our assets (including, among others, less than 25% owned equity investments) from time to time, determined pursuant to certain proposed Treasury regulations that are not yet in effect but are generally proposed to become effective for taxable years after December 31, 1994, there can be no assurance that we will not be considered a PFIC for any taxable year.
If we were treated as a PFIC for any taxable year during which a U.S. Holder held ADSs or ordinary shares, gain recognized by such U.S. Holder on a sale or other disposition of an ADS or an ordinary share would be allocated ratably over the U.S. Holder’s holding period for the ADS or the ordinary share. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for ordinary income of taxpayers of the U.S. Holder’s type for such taxable year, and an interest charge would be imposed on the amount allocated to such taxable year. Similar tax rules would apply to any distribution in respect of ADSs or ordinary shares in excess of 125% of the average of the annual distributions on ADSs or ordinary shares received by the U.S. Holder during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. Additionally, if we were a PFIC for any taxable year during which a U.S. Holder held an ADS or ordinary share, such U.S. Holder would be required to make an annual return on IRS Form 8621 for that year, describing the distributions received from BBVA and any gain realized on the disposition of ADSs or ordinary shares. Certain elections may be available (including a mark-to-market election) to U.S. persons that may mitigate the adverse consequences resulting from PFIC status.
Information Reporting and Backup Withholding
Information returns may be filed with the Internal Revenue Service in connection with payments of dividends on, and the proceeds from a sale or other disposition of, ADSs or ordinary shares. A U.S. Holder may be subject to U.S. backup withholding tax on these payments if the U.S. Holder fails to provide its taxpayer identification number to the paying agent and comply with certain certification procedures or otherwise establish an exemption from backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is furnished to the Internal Revenue Service.
F. Dividends and Paying Agents
G. Statement by Experts
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H. Documents on Display
The documents concerning BBVA which are referred to in this Annual Report may be inspected at its offices at Plaza de San Nicolás 4, 48005 Bilbao, Spain. In addition, we are subject to the information requirements of the Exchange Act, except that as a foreign issuer, we are not subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file or furnish reports and other information with the SEC. Reports and other information filed or furnished by BBVA with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC’s regional offices at The Woolworth Building, 233 Broadway, New York, New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be inspected at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on which BBVA’s ADSs are listed. In addition, the SEC maintains a web site that contains information filed electronically with the SEC, which can be accessed over the internet athttp://www.sec.gov.
I. Subsidiary Information
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk at BBVA
We consider risk management a basic capacity to facilitate the stable generation of value for shareholders.
The Group has assigned considerable resources to configure a risk management system that meets the need for identifying, measuring, assessing and monitoring, in a consistent and homogeneous way, all types of risk that may be incurred by a diversified and internationally active banking group such as BBVA and that complies with the future capital requirements laid down by Basel II.
Risks are classified as credit or counterparty risk, market risk (considering joint measurements of market and credit risks in these activities), structural risk (including liquidity, equity, interest and exchange rate risks) and operational risk.
The fundamental objectives of our risk management system are to meet the specific needs of customers and to preserve the solvency of the Group according to the risk profile expectations approved in its business strategies.
Our risk management system aims for an integrated management of all the risks involved in our different businesses and activities, based on an in-depth knowledge of each individual type of risk and of the potential interactions between them.
This risk management system is supported by the following components:
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Corporate Risk Governance Framework
In accordance with the recommendations of the Basel Committee, our Board of Directors defines the Group’s risk policy and approves financial credit risk planning. It also sets transaction limits and delegates authority on credit, market and structural risks. The Executive Committee of the Board is responsible for these matters.
The Board’s Risk Committee is responsible for supervising our risk management system on behalf of the Board of Directors, except for certain risk policies that are required by law to be approved another entity of the Group. The Risk Committee analyzes our risk strategies and policies and submits its recommendations to the Executive Committee.
The responsibilities of the Board’s Risks Committee include:
The Internal Risks Committee, made up of the Group’s corporate heads of risk management, handles the development and implementation of the risk management model at BBVA and assures that in day-to-day operations the risks contracted by the Group comply with the objectives defined in the risk profiles approved by the Board of Directors.
The Assets & Liabilities Committee (ALCO) is responsible for the active management of structural risks involving liquidity, interest rates and exchange rates, as well as risks relating to our capital structure.
The Technical Operations Committee analyses and approves credit transactions and financings that have been delegated to it, and refers those that are beyond its authority to the Risks Committee.
Tools, Circuits and Procedures
The Group has established risk management systems to measure and manage all of the different risks we face.
We view risk management as a continuous process, which has led us to establish management processes for each risk which include measuring tools for the admission, assessment and monitoring of risks, and to define appropriate procedures for risk management, all of which are set down in manuals along with the relevant management criteria.
The functions carried out by our risk management systems include:
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Internal Control
Consistent with recommendations of our regulators, we have established an independent internal risk control function that establishes working plans for each of our business areas aimed at correcting deviations from approved risk management criteria to ensure that the Group’s risk management is conducted in a manner that is consistent with the best available practices.
New Capital Accord (Basel II)
In June 2004 the Basel Committee on Banking Supervision approved the New Capital Accord (Basel II or the “Accord”), which is to serve as a reference for national regulators in the development of new standards for calculating capital. It is to be applied by financial institutions following its entry into effect at the end of December 2006. Approval of the Accord presents us with an opportunity to improve our risk management and to integrate the concepts of economic capital and regulatory capital.
In order to comply with the Accord, BBVA has established a Master Plan for Basel II. Under this plan, multidisciplinary teams from departments within the Group including risks, systems and operations, accounting and consolidation, management information services, financial management along with personnel from each of our business areas, are working to develop and implement tools, historical databases and other components needed to comply with the advanced risk management requirements of Basel II.
Overall Risk Map
Economic capital is a measure of the maximum losses that can be incurred with a set confidence level (99.9%) consistent with a target level of solvency.
Measurements of economic capital fit into management accounting by business units and their intrinsic valuation.
In 2003, BBVA initiated the Risk-Adjusted Return (RAR) Project to create the default and loss given databases required for measuring economic capital, expected loss and RAR for the Group as a whole.
As a result of progress in the RAR Project in 2004, highly detailed calculations are now available for economic capital by credit risk at the transaction level at our parent company and subsidiaries in Spain and at the aggregate level for the rest of the Group. During the course of 2005, transactional level calculations will become available for Mexico, Colombia and Peru and, as a result, more than 80% of our risk will be covered by economic capital calculations. By 2006, the system is expected to be extended to Argentina, Chile, Puerto Rico and Venezuela.
The accompanying graph shows the distribution of economic capital of the Group, by business area as of December 31, 2004, in attributable terms (net of minority interests).
Retail Banking Spain and Portugal represented 34% of economic capital, 52% of which corresponded to Commercial Banking and 27% to SME Banking. The Americas represented 27% of our economic capital, of which 57% corresponded to Mexico. Wholesale and Investment Banking represented 15% of our economic capital, while Corporate Activities, which includes holdings in industrial and financial firms and the management of structural balance-sheet risk, accounted for the remaining 24%.
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By type of risk as of December 31, 2004, credit risk continued to account for the largest portion (49%) of BBVA’s use of economic capital. At the same date, market risk, which includes structural balance sheet risks associated with variations in interest and exchange rates and equities portfolio risk, accounted for 33% of total economic capital, while operational risk accounted for 12%. Fixed assets and use of capital deriving from the activities of the Group’s insurance companies accounted for the remaining 6%.
Credit Risk Management
Evolution of credit risk exposure and quality
As of December 31, 2004, BBVA’s overall credit risk exposure increased by 9.5% to €351 billion, compared to €321 billion as of December 31, 2003.
Customer lending (56% of the total, including contingent liabilities) and credit lines drawable by third parties (17%) increased by 15.8% and 15.1%, respectively, in 2004, whereas the potential exposure to credit risk in market operations (27% of the total) decreased by 4.0%.
Credit risk in Retail Banking Spain and Portugal accounted for 57.4% of our total credit risk exposure, followed by Wholesale and Investment Banking, which accounted for 27.7% of the total.
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In 2004, the percentage of total lending made by the Group’s parent company, BBVA, S.A. (including branches located outside of Spain) and our subsidiaries in Spain, increased by approximately 1.0% to 82.6%. The percentage of our total lending in Europe (excluding Spain) in 2004 was 3.0%, while the percentage corresponding to lending in Latin America declined from 15.6% in 2004 to 14.4% in 2003. Of this 14.4%, 10.7% was concentrated in investment grade rated countries (7.4% Mexico, 2.0% Chile and 1.3% in Puerto Rico) and, accordingly, only 3.8% of our loans were in countries rated as below investment grade.
The trend in the Group’s fundamental credit risk quality indicators in 2004 was once again favorable. The balance of nonperforming assets decreased by 20% to €1.9 billion, with decreases spread across all business areas. Distribution of non-performing loans by business areas can be seen in the following chart:
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The decrease in the percentage of non-performing assets was principally due to a further reduction in the ratio of new nonperforming loans compared to total lending from 1.48% as of December 31, 2003 to 1.03% as of December 31, 2004 and to an improvement in the recovery rate to 36.6% as of December 31, 2004 of the critical mass (total of impaired loans plus new entries in the year), compared to 28.6% as of December 31, 2003.
As a result of the above, the non-performing loans (NPL) ratio was 0.95% as of December 31, 2004, a decrease of 0.42% from 1.03% as of December 31, 2003.
All business areas contributed to the reduction: As of December 31, 2004, the Retail Banking Spain and Portugal business area NPL ratio decreased to 0.61% from 0.85% as of December 31, 2003, in part due to a decrease in the ratio of new non-performing loans. As of December 31, 2004, the Wholesale and Investment Banking business area NPL ratio decreased to 0.19% from 0.50% as of December 31, 2003, while the Banking in the America business area NPL ratio decreased to 3.18% from 4.46% as of December 31, 2003.
As of December 31, 2004, the Group’s coverage ratio increased to 247.2% from 184.9% in 2003.
Credit risk profile
To facilitate the quantification and management of credit risk, we use rating and scoring tools. Two measures are used to determine and identify the Group’s credit risk profile: expected loss and economic capital (by credit risk).
Under Basel II regulations the use of internal models to measure credit risk and calculate insolvency risk coverage will be permitted only if those models are first approved by the Bank of Spain. To that end, BBVA submitted its consumer loan, mortgage loan, large corporations and SME credit rating models to the Bank of Spain in 2004.
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The Group has historical PD and LGD databases capable of storing detailed information on all transactions in each of our business areas. This means that precise estimates are now available for the inputs of PD, LGD and exposure at default (EAD), as required under Basel II.
These estimates form the basis for calculating expected loss and capital (economic and regulatory) under common premises for all of the Group’s banks. Under Basel II, the concept of “expected loss” is a key component in calculating provisions and capital and will enable us to make risk-adjusted valuations of operations.
We intend to be among the banks that use internal models for assessing credit risk immediately upon implementation of Basel II.
BBVA Master Scale. BBVA has a master scale which we use to apply a uniform classification to our different credit risk portfolios. Two versions exist: the narrow version, which classifies our credit risks in 13 categories, and the broad version, which classifies our credit risks into 34 categories.
Probability of Default
(in basis points)
Rating Master Scale
AAA
AA
A
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
CCC
Application of the master scale results in a distribution of our credit risk ratings for the parent bank and its Spanish subsidiaries, weighted by exposure. At December 31, 2004, 61% of our credit risk exposure was concentrated in A-rated or higher portfolios.
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If we exclude sovereign loans, 45% of our credit risk exposure is still rated at A or above, and 69% at BBB- or above.
The charts also show the distribution of our credit risk ratings in our small and medium size customer sector.
Probability of default.The Accord distinguishes between two customer segments for calculating capital requirements: retail (consumer loans, mortgages, small businesses, etc.) and non-retail transactions (SME’s, banks, sovereign, etc.). We have credit rating tools that clearly distinguish between these two segments.
Each credit risk measurement tool assigns a score for each transaction based on the counter party’s credit quality. It is only possible to link this score with PD if a broad historical database of credit scores and default histories exists which allows performance to be inferred. The implementation of the RAR Project has allowed PD to be calculated for all possible defaults for each transaction over the entire recovery process (not just the first default).
Scorings. The graph below shows PD curves for each credit risk scoring group, over time from the date of the transaction, in the consumer and mortgage retail businesses of BBVA Spain.
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It can be observed that PD in these two business segments is highest in the second year and that higher default rates are found in the highest scoring groups.
Ratings. The Group’s rating tools assign a credit risk score (and a PD via calibration) to each customer in accordance with specific quantitative and qualitative criteria that is adjusted to each of our business segments.
The average PD corresponding to rating scores for SME transactions is shown in the following graph.
As shown in the following graph, large corporates (with sales of more than €150m) have a lower PD.
LGD. The LGD (loss-given default) rate is defined as a predicted final loss if an event of default occurs as a percentage of risk exposure. It is the counterpart of the recovery rate, which is calculated as 100% minus the LGD rate. One of our priorities is to obtain estimates of LGD that are as precise as possible and to minimize LGD with effective recovery mechanisms.
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LGD is calculated by the “Workout LGD” method, which is based on discounting the amounts recovered from a defaulted exposure as a result of the recovery process.
The methods we use to estimate LGD differ according to the type of product in question. For retail products, such as consumer loans, the approach used is contract-based, while for many other products it is customer-based.
Consumer loans. As shown in the graph below, the more time that has passed since the granting of a loan to the default on the loan, the lower the associated LGD due to generally declining loan default rates over time from loan issuance and the success of recoveries.
The following graph shows the trend in LGD over the time period in which a transaction remains in default following the original default date, which this is known as the debt ratio. The LGD increases as default period increases.
The lines in the graph below correspond to the year in which a transaction goes into default and the time period during which such loan remains in default. The graph demonstrates that both the age of a transaction and the time elapsed at default are significant in estimating LGD. We therefore adjust LGD calculations by taking into account the age of a transaction and the time it has been in default.
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Residential mortgages. The graph below shows the year in which a transaction goes into default and the time period during which such loan remains in default. As with consumer loans, both factors are significant in estimating LGD.
The loan to value (LTV) ratio is a characteristic feature of mortgage loans which may be expected to influence the LGD. The graph below shows how LGD varies as a function of LTV according to how long the loan remains in default. The lines on the graph correspond to different LTV’s (expressed as percentages): it can be seen that the higher the LTV, the greater the LGD.
The significant factors noted above that were taken into account in estimating LGD for consumer loans were also taken into account to adjust LGD for each transaction in our mortgage loan portfolio.
SME products. The graphs below display LGD studies conducted for certain corporate products (loans, credit lines, portfolios, leasing and renting) using a customer-based approach.
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The following graph sets forth the variations in LGD of loans, credit lines and portfolio products without collateral over time from the date each transaction was entered into the date of default by the customer and how long the customer remains in default. LGD is affected by both factors.
The following graph shows the trend in LGD for leasing and renting products according to how long the customer remains in default from the initial default date. It can be seen that LGD increases as the time the customer remains in default increases.
LGD rates depend on the type of product and whether guarantees or collateral were granted in connection with the transaction.
Exposure at the time of default. Exposure at the time of default is another factor we use to predict expected losses on our transactions.
Adjustment to the economic cycle. In 2004, we reassessed the methods by which we adjust expected losses from credit risk in our various portfolios to the economic cycle. To calculate these adjustments, the conditions prevailing at such time are linked with those expected to exist in the future.
This method is supplemented by a stress analysis on expected losses. First, the stress of underlying risk factors for the different categories of credit risk is measured. It can then be determined to what extent future expected loss could be affected by scenarios of economic downturn, high interest rates or, in the specific case of the mortgage portfolio, corrections in the real-estate market.
Expected losses. As in prior years, in 2004 our expected losses were adjusted in light of new information provided by our historical risk databases. It is important to emphasize that the expected losses indicated below have been adjusted upwards, as noted above, in line with our assessment of the economic cycle.
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The breakdown of our expected losses as a percentage of exposure shows that our Spanish banking group accounts for 76% of total exposure and has an expected loss of 0.28% of that exposure. Mexico and the remainder of the Group have expected losses of 0.78% and 1.07%, respectively.
The following graph shows our expected loss attributable to our principal business areas. The Wholesale and Investment Banking business area accounted for 35% of exposure and the Retail Banking Spain and Portugal business area for 41%. The expected loss attributable to the Wholesale and Investment Banking business area and the Retail Banking Spain and Portugal business area was 0.07% and 0.47%, respectively. The Banking in America business area (not including Mexico) had an expected loss of 1.27% of exposure.
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Finally, the expected loss rates and economic capital for the main portfolios of the parent bank in Spain are also detailed in the table below.
Portfolios
Consumer loans
Mortgage loans
SME’S(2)
Corporates(3)
Market Risk Management by Business Area
We manage credit risk and market risk jointly in each of our business areas (including the treasury activities conducted therein) through a Central Risk Unit within each business area.
These units set appropriate limits on the business activities carried out by each business area. The Executive Committee of our Board of Directors approves these limits. These units determine an overall VaR (Value-at-Risk) for each business unit and establish specific sub-limits by types of risk, activities and trading floors.
Limits are also set on losses and other control measures such as delta sensitivity. The proactive management of this limit structure is supplemented by a broad range of indicators and alerts that automatically activate procedures designed to deal with situations that could have negative repercussions on the activities of each business area.
The measurement model used is VaR, considering a covariance matrix with a confidence level of 99% and a time horizon of one day. Also considered are basis risk, spread, convexity and other risks associated with option positions and structured products. This means that the maximum loss that could be incurred by portfolios as a result of volatility in equity markets and in interest and exchange rates is measured.
In addition, periodic settlement VaR calculations are made in some portfolios, taking into account the liquidity condition in financial markets at any given time.
Finally, the market risk measurement model incorporates back-testing or ex-post comparison, which helps increase the precision of the risk measurements we make.
Stress-testing is also carried out, with periodic calculations of exposure to loss of each business area, considering the impact of financial crises in the past and potential scenarios and predictions for the future.
We have continued to implement our new risk measurement platform, which is now fully operational in our Investment Banking unit. This platform enables market risk assessment to be integrated with credit risk assessment and uses the historical simulation and Monte Carlo methods, applying full valuation to options products, which results in an increase in the accuracy of risk estimations. We intend to extend this platform shortly to our Latin American business units, starting with Mexico.
Market Risk in 2004. Increases in geopolitical risk levels, especially in the first half of 2004 (e.g., the Madrid train bombings and subsequent terrorist attacks), and rises in the price of oil which reached record levels in October affected the financial markets because of the resulting uncertainty as to the continuation of economic growth. In spite of this, most leading stock market indices in developed markets were higher as of December 31, 2004 compared to December 31, 2003 and those that did not increase did not experience significant declines. In emerging markets spreads for sovereign risk declined, government debt showed a positive yield and stock prices rose considerably.
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Against this backdrop, the trend of market risk we experienced was characterized by an increasing risk profile in the early months of the year with maximum levels in May as a result of the uncertainty in the financial markets, followed by a slow decrease in subsequent months.
The average market risk of the BBVA Group in 2004, in terms of VaR, was €26.25m on average.
The main market risk that we face is interest rate risk (66% of total market risk at December 31, 2004), which includes both the systematic risk and the specific risk linked to spreads. Vega and correlation risks account for 12% and 8% of total market risk, equity risk for 9% and currency risk for 5% of our total market risk.
Risk
Interest(*)
Exchange rate(*)
Equity(*)
Vega and correlation
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By geographical area, Europe and the United States of America accounted for 64.6% of market risk, Latin America accounted for 35.4% and Mexico accounted for 27.5% as of December 31, 2004.
Average use of limits by our main business units was 41% as of December 31, 2004.
As shown in the following graph, back-testing for our market risk in 2004, which runs day-to-day comparisons between the results of revaluation of positions and the level of risk estimated by our risk model, confirms that our risk management model functioned properly.
Credit Risk in Market Activities
Credit risk in OTC financial instruments is calculated by considering the daily marking to market of the positions held, plus an estimate of the maximum expected increase in value through to maturity.
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In 2004, we introduced a new measurement system based on Monte Carlo simulation for all transactions. This method has resulted in substantial improvements in our estimates of counterparty risk because:
Our maximum credit risk exposure to counterparties was €12.6 billion as of December 31, 2004, a decrease of 14% from December 31, 2003.
The policy of entering into netting and/or collateral agreements was extended, and these agreements now represent a significant proportion of our total exposure.
The net market value of the instruments mentioned above in the portfolio at December 31, 2004 was €503 million, with a mean residual term of 101 months. The gross replacement value was €11.7 billion at December 31, 2004.
The table below shows the distribution by residual term of equivalent maximum exposure amounts for OTC financial instruments.
OTC financial instruments
IRS
FRA’s
OTC interest rate diversification
TOTAL OTC INTEREST RATE
Forward FX
Currency swaps
Currency options
OTC exchange rate diversification
TOTAL OTC EXCHANGE RATE
OTC equity
Fixed income and others
OTC equity and others diversification
TOTAL OTC EQUITY AND OTHERS
TOTAL DIVERSIFlCATION
Type of product
Up to
6 months
1 year
3 years
OTC interest rate
OTC exchange rate
OTC equity and others
Total diversification
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The counterparty risk we assume in these transactions is generally with entities with higher credit ratings (89% of them are rated A- or higher).
Structural Risk Management
The exposure of a financial institution to variations in market interest rates is a risk inherent to banking, but also an opportunity to create economic value. The main source of structural interest rate risk is the difference between maturity and repricing dates (depending on whether fixed- or variable-rate positions are involved). This market rate risk affected by curve risk which entails changes in the slope and form of the interest rate curve over time, and basis risk which arises due to the imperfect correlation between variations in interest rates of different instruments with similar characteristics.
To control structural interest rate risk; interest rate risk limits are established each year by the Executive Committee of our Board of Directors. We then compare our actual interest rate risk to these limits. The graph below shows the average use of limits in 2004 and it can be seen that no limits were exceeded during such period.
Our structural interest rate risk is actively managed and continuously monitored by the Assets and Liabilities Committee (ALCO) consistent with the basic principles set forth by the Basel Committee in its 2004 consultative paper “Principles for the Management and Supervision of Interest Rate Risk”. To that end, we have developed a number of tools and an organizational structure with clear allocation of responsibilities, to ensure that control and management functions are independent.
The purpose of structural interest rate risk management is two-fold: to reduce the impact of interest rate variations on net interest income and to protect the economic value of the Group. To manage our interest rate risk we use financial instruments such as Treasury bills and bonds (issued by Spain and other euro-zone countries) and derivatives (interest rate swaps, options, future, etc.).
The on-balance sheet gap table below shows the distribution of maturities or repricing dates of our sensitive assets and liabilities in euros, grouped by market type as of December 31, 2004.
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Money market
TOTAL SENSITIVE ASSETS
Customers deposits
Wholesale financing
Other sensitive liabilities
TOTAL SENSITIVE LIABILITIES
ON-BALANCE-SHEET GAPS
OFF-BALANCE-SHEET GAPS
TOTAL GAPS
Measurement of structural interest rate risk involves projections of net interest income for one- and two-year horizons, taking into account the actual interest rates and expected evolution of the balance sheet. Our economic value is calculated as the net present value of the expected evolution of the balance sheet. Subsequently, considering different market interest rate scenarios, curve simulations are performed that reflect other types of movement, such as changes in slope and curvature or parallel movements of different scales, calculating a distribution of impacts on net interest income and economic value that enables maximum negative variations to be calculated with a confidence level of 99%. This calculation provides a measure of economic capital by structural interest rate risk and enables risk to be managed on the basis of the balance between expected results and economic value.
The accompanying graph shows the risk levels of the principal banks within the Group, which remained stable throughout 2004.
In 2004, the principal aim of structural interest rate risk management was to reduce the impact on net interest income of the lower absolute level of interest rates in the markets in which we operate. As part of this structural interest rate risk management process, the ALCO held structural coverage positions worth €23.0 billion as of December 31, 2004. This portfolio generated ordinary revenues of €372 million in 2004.
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Structural Exchange Rate Risk
Structural exchange rate risk refers to the potential losses that may arise as a result of adverse movements in exchange rates. Our exposure to this risk arises principally from our Latin American operations.
Structural exchange rate risk is managed by the ALCO on the basis of regular measurements by the Risks units using an exchange rate scenario simulation model that takes into account both past trends and forecasts over a one-year time frame. These forecasts cover various market performance scenarios, including crisis scenarios, to which probabilities of occurrence are assigned. A distribution of annual results from exchange rate variations is thereby obtained that provides the maximum potential loss with a confidence level of 99%.
These calculations determine the economic capital as well as the contribution of the different operations to that risk. This allows our management to base its decisions on the balance between contribution to risk and expected results for each position.
The ALCO actively manages structural exchange rate risk with two objectives: to minimize the impact of currency depreciation on our consolidated income statement and to protect our asset value by reducing the effect of exchange rate variations on reserves.
In 2004, structural exchange rate risk was managed in the context of a significant depreciation of the U.S. dollar against the euro, and of stability of Latin American currencies against the U.S. dollar. Our active exchange rate risk management allowed us to end 2004 with equity coverage of 47% (mainly centered on Mexico and Chile) and with a significant proportion of our operating results derived from our Latin American operations also to be covered.
Liquidity Risk
We manage liquidity risk to reduce the possibility of having to obtain funds on undesirable terms to meet payment obligations.
Liquidity is monitored on a short-term (up to 90 days), medium and long-term basis with our monitoring and management functions kept separate.
Liquidity risk is monitored by the Risks unit, which is responsible for regularly assessing liquidity, for developing tools and valuation models and for monitoring authorized limits. The limit structure authorized by the Executive Committee of our Board of Directors provides a basis to anticipate any future liquidity problems.
In addition, payment and collection flow simulations are analyzed to assess the consequences of hypothetical liquidity crises. These analyses form part of the crisis situation liquidity monitoring model as outlined in our Contingency Plan, which sets forth responsibilities in the event of system-wide or specific liquidity stresses.
The ALCO is responsible for ensuring that the resources needed to carry on our operations on a medium-term and long-term basis are available. To that end it analyzes the credit gap, establishes wholesale financing needs and draws up a financing plan appropriate for those needs.
Financing policy is based on the principle of diversification of sources of financing and maturity periods and varies depending on the average maturity of the credit assets to be financed. To that end, various types of financial instruments are used, including straight bonds, mortgage bonds and securitizations.
In 2004, we issued straight and subordinate bonds in an aggregate principal amount of €6.5 billion, mortgage-backed securities in an aggregate principal amount of €9.4 billion, and €2 billion in two securitizations of portfolios of loans for car purchases and loans for SME’s.
Structural Risk Management of our Equities Portfolio
Structural risk of our equities portfolios refers to the potential loss in value of positions in shares and other equity instruments due to variations in share values or equity indices. Our exposure to this type of structural risk arises primarily from our holdings in industrial and financial companies with medium-term and long-term investment horizons.
The Group’s Risks Department effectively measures and monitors the structural risk of our equity holdings and monitors compliance with the risk limits and policies of the various business units as approved by the Executive Committee of our Board of Directors. Risk limits on equity positions in our investment portfolio are established in terms of the use of economic capital attributable to a predetermined activity or portfolio. These limits on economic capital are supplemented by limits on investment and concentration. Depending on the nature of the positions, stop-loss limits are also established by strategy and by portfolio, reinforced by a system of results-related early warning signals to detect any limits that have been exceeded as soon as possible. In addition, regular stress testing and back testing are carried out.
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Favorable trends in equity markets in 2004 resulted in an increase in the value of our structural risk exposure, which was offset by sales of certain equity interests, active management of our equities portfolio through derivative instruments and by increased diversification. As a result, the overall structural risk of our equities portfolios remained stable.
Operational risk management
The Basel Committee on Banking Supervision defines “operational risk” as risk that may result in losses as a result of human errors, unsuitable or faulty internal controls, system failures or external causes. BBVA defines operational risk as risk that is neither credit, market nor technical (insurance) risk. This definition includes strategic and regulatory risk.
BBVA distinguishes between the following types of operational risk:
Type
Origin
Process
Fraud and unauthorised activity
Technology
Human resources
Commercial practices
Disasters
Suppliers
In 2004, we continued to implement a broad range of tools created in-house (Ev-Ro, TransVaR, SIRO, CORO and RepTool) to identify, measure, evaluate and mitigate risks of this type.
We manage operational risk in two ways: qualitatively (detecting exposure to risk before it arises) and quantitatively (learning from events when they occur).
The tools we use to manage operational risk are the following:
1) Ev-Ro: This is a tool for the identification and valuation of operational risks by business or support areas. The information obtained is used to prepare risk maps, which are the starting point for mitigation processes. This tool is implemented at more than 80% of the Group’s units. In general, 20% of the risks detected require immediate action for mitigation, and action is taken accordingly.
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As an example, the two graphs below summarize the distribution by types of operational risk at the BBVA Insurance Spain and Global Markets and Distribution business units.
2)TransVaR: This is a tool that monitors business units for indicators of operational risk. TransVaR is in place at around 50% of our business units. Our use of this tool has demonstrated that operational risk is reduced at the business units where this tool is in place.
3) SIRO: This is a set of databases of operational risk events classified by risk type and business line. The databases are located in each country and uploaded every month into a central database called SIRO Global, where all of the information is consolidated. This tool was implemented in Spain in January 2002 and in Latin America in July 2002.
The graphs below show the distribution by countries and risk types of operational risk events on a cumulative basis in 2004.
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4) CORO: This is a new self-assessment tool that uses a scoring technique to measure operational risk at business units with large numbers of branches. The self-assessment tool is comprised of 287 questions and 35 basic criteria to enable risks to be weighted with a rating on a scale of 0 to 10 (with 0 being the minimum and 10 the maximum) and to identify risk factors.
CORO was implemented in 2004 in our Commercial Banking Spain business unit. Results based on a statistical sample with a guaranteed confidence level of 95% and a margin of error of 1% show a score for the Commercial Banking Spain business unit of 3.5 out of 10, equivalent to an overall operational risk rating of “low”.
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RepTool: This is a reputational risk management tool. Reputational risk generally arises as a result of events caused by other types of risk. RepTool is used to identify reputational risk factors so that they can be mitigated. In 2004 RepTool was implemented in our Special Financial Services business unit (Finanzia and Uno-e) and in the International Private Banking business unit, and work has begun to implement it in the Global Corporate Banking business unit.
The management model
Operational risk management is in place in all business and support units. Corporate tools are used in these units as sources of information on risks, events and causes and the starting point for mitigation plans.
Our Central Operational Risk Unit designs and manages the implementation of risk assessment and monitoring tools for the Group. Each of our subsidiary banks has an Operational Risk unit that performs the same task as the Central Operational Risk Unit in the country in which the bank conducts its operations. Each business and support unit has an Operational Risk Manager who manages this risk in that unit. There is also an Operational Risk Committee, which meets periodically to analyze risk information available and determine the most appropriate mitigation plans.
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
As of December 31, 2004, BBVA, under the supervision and with the participation of BBVA’s management, including our chairman and chief executive officer, president and chief operating officer and head of the office of the chairman, whose responsibilities include accountancy, internal audit and compliance, performed an evaluation of the effectiveness of BBVA’s disclosure controls and procedures. BBVA’s management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives. Based on this evaluation, BBVA’s chairman and chief executive officer, president and chief operating officer and head of the office of the chairman concluded that BBVA’s disclosure controls and procedures are effective at the reasonable assurance level for gathering, analyzing and disclosing the information BBVA is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. There has been no change in BBVA’s internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, BBVA’s internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
We have not determined whether any particular member of our Audit and Compliance Committee is a “financial expert” and, therefore, have not named any particular member of such Committee as our “Audit Committee Financial Expert” in accordance with SEC rules and regulations. The charter for our Audit and Compliance Committee which was approved by our Board of Directors, however, provides that the Chairman of the Audit and Compliance Committee is required to have experience in financial matters as well as knowledge of the accounting standards and principles required by BBVA’s regulators. In addition, we believe that the remaining members of the Audit and Compliance Committee have an understanding of applicable generally accepted accounting principles in Spain, experience analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our Consolidated Financial Statements, an understanding of internal controls over financial reporting, and an understanding of audit committee functions. Our Audit and Compliance Committee has experience overseeing and assessing the performance of BBVA and its consolidated subsidiaries and our external auditors with respect to the preparation, auditing and evaluation of our consolidated financial statements.
ITEM 16B. CODE OF ETHICS
BBVA’s Code of Ethics and Conduct applies to its chief executive officer, chief financial officer and chief accounting officer. This code establishes the principles that guide these officers’ respective actions: ethical conduct, professional standards and confidentiality. It also establishes the limitations and defines the conflicts of interest arising from their status as senior executives. We have not waived compliance with, nor made any amendment to, the Code of Ethics and Conduct. BBVA’s Code of Ethics and Conduct can be found on its website at www.bbva.com.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table provides information on the aggregate fees billed by our principal accountants, Deloitte, S.L., by type of service rendered for the periods indicated.
Services Rendered
Audit Fees (1)
Audit-Related Fees (2)
Tax Fees (3)
All Other Fees (4)
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The Audit And Compliance Committee’s Pre-Approval Policies And Procedures
In order to assist in ensuring the independence of our external auditor, the charter of our Audit and Compliance Committee provides that our external auditor is generally prohibited from providing us with non-audit services, other than under the specific circumstance described below. For this reason, our Audit and Compliance Committee has developed a pre-approval policy regarding the contracting of BBVA’s external auditor, or any affiliate of the external auditor, for professional services. The professional services covered by such policy include audit and non-audit services provided to BBVA or any of its subsidiaries reflected in agreements dated on or after May 6, 2003.
The pre-approval policy is as follows:
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Period of Fiscal Year
January 1 to January 31
February 1 to February 29
March 1 to March 31
April 1 to April 30
May 1 to May 31
June 1 to June 30
July 1 to July 31
August 1 to August 31
September 1 to September 30
October 1 to October 31
November 1 to November 30
December 1 to December 31
During 2004, we did not purchase any of our ordinary shares pursuant to a publicly announced plan or program. We also sold 282,161,848 of our ordinary shares during 2004 for an average price of €11.31 per share. On March 29, 2005, we announced that our Board of Directors had resolved to launch a share buy-back program of our own shares subject to the following conditions: (i) the number of such shares to be purchased shall not exceed 3.5% of our share capital, (ii) the purchase price shall not be higher than €14.5 per share and (iii) the period of the share buy-back program shall expire on September 30, 2005. Between April 18 and June 27, 2005, we purchased 11,213,799 of our ordinary shares pursuant to the share buy-back program, representing 0.33% of our capital stock.
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PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this item.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of all financial statements filed as a part of this Annual Report.
ITEM 19. EXHIBITS
(a) Index to Financial Statements
Report of Independent Registered Public Accountants of Banco Bilbao Vizcaya Argentaria, S.A.
Consolidated Balance Sheets as of December 31, 2002, 2003 and 2004
Consolidated Statements of Income for the Years Ended December 31, 2002, 2003 and 2004
Notes to the Consolidated Financial Statements
(b) Index to Exhibits:
Description
We will furnish to the Commission, upon request, copies of any unfiled instruments that define the rights of holders of our long-term debt.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and had duly caused this Annual Report to be signed on its behalf by the undersigned, thereto duly authorized.
By:
/s/ JOSÉ SEVILLA ÁLVAREZ
Name:
José Sevilla Álvarez
Title:
Head of the Office of the Chairman
Date: June 30, 2005
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INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Banco Bilbao Vizcaya Argentaria, S.A.:
We have audited the accompanying consolidated balance sheets of BANCO BILBAO VIZCAYA ARGENTARIA, S.A. and COMPANIES composing the BANCO BILBAO VIZCAYA ARGENTARIA Group (“the Group”—Note 4) as of December 31, 2004, 2003 and 2002, and the related consolidated statements of income for the years then ended. These consolidated financial statements are the responsibility of the controlling Company’s Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material aspects, the financial position of Banco Bilbao Vizcaya Argentaria, S.A. and Companies composing the Banco Bilbao Vizcaya Argentaria Group as of December 31, 2004, 2003 and 2002, and the results of their operations and the funds obtained and applied by them for the years then ended in conformity with accounting principles generally accepted in Spain.
As indicated in Note 2-g, in 2003 and 2002 the Group charged to retained earnings the estimated cost of the indemnity payments, deferred compensation and the future contributions to external pension funds arising from the early retirement of certain employees who effectively formalized their early retirement in those years, for an amount, net of the related tax effect, of €520 million and €324 million respectively, for which it had express authorization for the Bank of Spain, pursuant to Rule 13 of Bank of Spain Circular 4/1991, and of the related Shareholders´ Meetings. In 2004 the Bank of Spain did not generally grant this authorization; accordingly, pursuant to the aforementioned Rule of Bank of Spain Circular 4/1991, the Bank recorded net provisions of €372 million with charge to the consolidated statement of income to meet its commitments to the employees who took early retirement in that year (€572 million were charged to the “Extraordinary Losses” caption in the consolidated statement of income for 2004 referred to above and, at the same time, the related deferred tax asset was recorded for €200 million).
Accounting principles generally accepted in Spain vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of net income for each of the three years in the period ended December 31, 2004, 2003 and 2002 and the determination of stockholders’ equity and financial position as of December 31, 2004, 2003 and 2002, to the extent summarized in Note 32.
/S/ DELOITTE, S.L.
Deloitte, S.L.
Madrid – Spain, February 3, 2005, except for the Note 32 as to which the date is June 30, 2005.
F - 2
BANCO BILBAO VIZCAYA ARGENTARIA, S.A. AND COMPANIES COMPOSING
THE BANCO BILBAO VIZCAYA ARGENTARIA GROUP
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004, 2003 AND 2002 (Notes 1 to 5)
- Thousands of Euros -
CASH ON HAND AND DEPOSITS AT CENTRAL BANKS:
Cash
Bank of Spain
Other central banks
GOVERNMENT DEBT SECURITIES (Note 6)
DUE FROM CREDIT INSTITUTIONS (Note 7):
TOTAL NET LENDING (Note 8)
DEBENTURES AND OTHER DEBT SECURITIES (Note 9)
COMMON STOCKS AND OTHER EQUITY SECURITIES (Note 10)
INVESTMENTS IN NON-GROUP COMPANIES (Note 11)
INVESTMENTS IN GROUP COMPANIES (Note 12)
INTANGIBLE ASSETS (Note 14):
Incorporation and start-up expenses
Other deferred charges
CONSOLIDATION GOODWILL (Note 13):
Fully and proportionally consolidated companies
Companies accounted for by the equity method
PROPERTY AND EQUIPMENT (Note 14):
Land and buildings for own use
Other property
Furniture, fixtures and other
CAPITAL STOCK SUBSCRIBED BUT NOT PAID (Note 23)
TREASURY STOCK (Note 23)
OTHER ASSETS (Note 15)
ACCRUAL ACCOUNTS (Note 16)
ACCUMULATED LOSSES AT CONSOLIDATED COMPANIES (Note 24)
TOTAL ASSETS
MEMORANDUM ACCOUNTS (Note 26)
F - 3
LIABILITIES AND EQUITY
DUE TO CREDIT INSTITUTIONS (Note 17):
DEPOSITS (Note 18):
Savings accounts-
Current
Time
Other deposits-
MARKETABLE DEBT SECURITIES (Note 19):
Bonds and debentures outstanding
Promissory notes and other securities
OTHER LIABILITIES (Note 15)
PROVISIONS FOR CONTINGENCIES AND EXPENSES (Note 20):
Pension provision
Provision for taxes
Other provisions
GENERAL RISK ALLOWANCE
NEGATIVE CONSOLIDATION DIFFERENCE (Note 13)
CONSOLIDATED INCOME FOR THE YEAR:
Group
Minority interests (Note 22)
SUBORDINATED DEBT (Note 21)
MINORITY INTERESTS (Note 22)
CAPITAL STOCK (Note 23)
ADDITIONAL PAID-IN CAPITAL (Note 24)
RETAINED EARNINGS (Note 24)
REVALUATION RESERVES (Note 24)
RESERVES AT CONSOLIDATED COMPANIES (Note 24)
TOTAL LIABILITIES AND EQUITY
The accompanying Notes 1 to 31 and Exhibits I to IV are an integral part of the consolidated balance sheet as of December 31, 2004.
F - 4
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 2004, 2003 AND 2002 (Notes 1 to 5)
FINANCIAL REVENUES (Note 28)
Of which: Fixed-income portfolio
FINANCIAL EXPENSES (Note 28)
INCOME FROM EQUITIES PORTFOLIO (Note 28):
Common stocks and other equity securities
Investments in non-Group companies
Investments in Group companies
NET INTEREST INCOME
FEES COLLECTED (Note 28)
FEES PAID (Note 28)
MARKET OPERATIONS (Notes 20 and 28)
GROSS OPERATING INCOME
OTHER OPERATING INCOME (Note 28)
GENERAL ADMINISTRATIVE EXPENSES (Note 28):
Of which:
Wages and salaries
Employee welfare expenses
Of which: Pensions
Other Administrative Expenses
DEPRECIATION AND AMORTIZATION (Note 14)
OTHER OPERATING EXPENSES
NET OPERATING INCOME
NET INCOME FROM COMPANIES ACCOUNTED FOR BY THE EQUITY METHOD (Note 28):
Share in income of companies accounted for by the equity method
Share in losses of companies accounted for by the equity method
Correction for payment of dividends
AMORTIZATION OF CONSOLIDATION GOODWILL (Note 13)
INCOME ON GROUP TRANSACTIONS:
Income on disposal of investments in fully and proportionally consolidated companies
Income on disposal of investments accounted for by the equity method (Note 11)
Income on transactions involving Parent Company shares and Group financial liabilities
Reversal of negative consolidation differences
LOSSES ON GROUP TRANSACTIONS:
Losses on disposal of investments in fully or proportionally consolidated companies
Losses on disposal of investments accounted for by the equity method (Note 11)
Losses on transactions involving Parent Company shares and Group financial liabilities
NET LOAN LOSS PROVISIONS (Note 8)
NET SECURITIES WRITEDOWNS (Note 11)
NET CHARGE TO GENERAL RISK ALLOWANCE
EXTRAORDINARY INCOME (Note 28)
EXTRAORDINARY LOSSES (Note 28)
PRE-TAX PROFIT
CORPORATE INCOME TAX (Note 25)
OTHER TAXES (Note 25)
NET INCOME
NET ATTRIBUTABLE PROFIT
The accompanying Notes 1 to 31 and Exhibits I to IV are an integral part of the consolidated statement of income as of
F - 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 2004
Banco Bilbao Vizcaya Argentaria, S.A. (“the Bank” or “BBVA”) is a private-law entity governed by the rules and regulations applicable to banks operating in Spain. The Bank conducts its business through branches and offices located throughout Spain and abroad.
On June 1, 1988, the Special Shareholders’ Meetings of Banco de Bilbao, S.A. and Banco de Vizcaya, S.A. resolved, inter alia, to approve the equal-footing merger of the two companies by dissolving them without liquidation and transferring in bloc to the new company, which adopted the name of Banco Bilbao Vizcaya, S.A. (BBV), by universal succession, the assets and liabilities of the two dissolved companies.
On December 18, 1999, the Special Shareholders’ Meetings of Banco Bilbao Vizcaya, S.A. and Argentaria, Caja Postal y Banco Hipotecario, S.A. approved the merger of the two entities through the absorption of Argentaria by Banco Bilbao Vizcaya, S.A. The Shareholders’ Meetings also approved the audited merger balance sheets of the two entities as of September 30, 1999. After the mandatory time periods had elapsed and the relevant administrative authorizations had been obtained, on January 25, 2000, the related public deed was executed, the registration of which at the Vizcaya Mercantile Registry on January 28, 2000, determined the legal effectiveness of the merger, and simultaneously the corporate name of Banco Bilbao Vizcaya, S.A. was changed to Banco Bilbao Vizcaya Argentaria, S.A.
a) Basis of presentation-
The consolidated financial statements of the Bank and companies composing the Banco Bilbao Vizcaya Argentaria Group (“the Group”—Note 4) are presented in the formats stipulated by Bank of Spain Circular 4/1991, on June 14, and its subsequent amendments and, accordingly, they present a true and fair view of the Group’s net worth, financial position and results. These consolidated financial statements were prepared from the individual accounting records of Banco Bilbao Vizcaya Argentaria, S.A. and of each of the Group companies and include the adjustments and reclassifications required to conform the accounting principles and presentation criteria followed by the subsidiaries with those followed by the Bank (Note 3).
The consolidated financial statements as of December 31, 2004, 2003 and 2002 and for the three years ended December 31, 2004, 2003 and 2002 are based on the Spanish financial statements of the Banco Bilbao Vizcaya Argentaria Group, prepared in accordance with the generally accepted accounting principles in Spain (“Spanish GAAP”) by the controlling company’s directors.
The individual and consolidated financial statements for 2004, 2003 and 2002 were approved by the Shareholders’ Meetings on February 26, 2005, February 28, 2004, and March 1, 2003, respectively.
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b) Accounting policies-
The consolidated financial statements were prepared in accordance with the generally accepted accounting principles in Spain described in Note 3. All obligatory accounting principles with a material effect on the consolidated financial statements were applied in preparing them.
c) Consolidation principles-
In accordance with Law 13/1985 and Bank of Spain Circular 4/1991, the Banco Bilbao Vizcaya Argentaria Group is defined as including all the companies whose line of business is directly related to that of the Bank and which, together with the latter, constitute a single decision-making unit (Note 4). In accordance with this Circular, these companies were fully consolidated and the adjustments and reclassifications required to unify the accounting principles and presentation criteria followed by the subsidiaries were performed. All material intercompany accounts and transactions between the consolidated companies were eliminated in consolidation. This method follows the rules as expressed by ARB 51 and SFAS 94. In accordance with Bank of Spain Circular 4/1991, the consolidated financial statements maintain the provisions for country risk recorded by the Bank and other Group companies for risk-asset and off-balance-sheet risk exposure to Group entities with registered offices in financially-troubled countries. As of December 31, 2004, 2003 and 2002, these provisions amounted to €25,249 thousand, €162,321 thousand and €93,714 thousand, respectively (Notes 7, 8 and 9).
The Group companies which engage in insurance brokerage were fully consolidated in 2004 since it is considered that this activity is an extension of that carried on by the Financial Group. Through 2004 these companies had been accounted for by the equity method. For the purpose of comparison with previous years, the effect of this change is not material.
The companies whose line of business is related to that of the Bank, and which are at least 20% owned by the Bank and managed jointly with another shareholder (or shareholders) were consolidated proportionally, which consists of including the assets, rights and obligations, and revenues and expenses of these companies in proportion to the Group’s holding in them. As of December 31, 2004, this consolidation method was applied to Advera, S.A., Corporación IBV Participaciones Empresariales, S.A., Corporación IBV Servicios y Tecnologías, S.A., E-Ventures Capital Internet, S.A., Holding de Participaciones Industriales 2000, S.A. and PSA Finance Argentina Compañía Financiera, S.A. As of December 31, 2003 and 2002, this consolidation method was applied to E-Ventures Capital Internet, S.A, Corporación IBV Participaciones Empresariales, S.A., Altura Markets, A.V., S.A., PSA Finance Argentina Compañía Financiera, S.A. and Corporación IBV Servicios y Tecnologías, S.A.
Additionally, the long-term holdings in the capital stock of subsidiaries not consolidable because their line of business is not directly related to that of the Bank and of other unlisted companies in which significant influence is exercised or with which the Bank has a lasting relationship and in which such holdings generally represent 20% or more of the capital stock (3% or more if listed) are valued at the amount of the portion of the investees’ net worth corresponding to such holdings, after deducting the dividends collected from them and other eliminations (equity method). Other holdings in companies (Note 11) which are short term or which do not represent significant influence, or for which futures transactions have been arranged to eliminate the price risk, are valued separately by the methods described in Note 3-e.
The remaining equity investments are presented in the accompanying consolidated balance sheets as described in Note 3-e.
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d) Determination of net worth-
In evaluating the net worth of the Group, the balances of the following captions in the accompanying consolidated balance sheets should be taken into consideration:
Capital stock (Note 23)
Reserves (Note 24)-
Additional paid-in capital
Reserves
Revaluation reserves
Reserves at consolidated companies
Accumulated losses at consolidated companies
Add-
Net income-
Less-
Interim dividends (Notes 5 and 15)-
Paid
Unpaid
Treasury stock (Note 23)
Net worth per books
Final dividend (Note 5)
Net worth, after the distribution of income for the year
e) Equity-
Law 13/1992, on June 1, and Bank of Spain Circular 5/1993, on March 26, and subsequent amendments enacted the regulations governing minimum equity requirements for credit entities at both individual and consolidated group levels.
As of December 31, 2004, 2003 and 2002, the Group’s eligible equity amounted to €20,144,358 thousand, €18,799,128 thousand and €17,840,156 thousand, respectively. These amounts exceed the minimum equity requirements stipulated by the aforementioned regulations.
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f) Detail of risk provisions and coverage-
In accordance with Bank of Spain regulations, the risk provisions and coverage are presented as assigned to the related assets and/or in specific accounts. The detail of the aggregate risk provisions, coverage and guarantees, disregarding their accounting classification, is as follows:
Loan loss provision (Note 3-c) (*)
Due from credit institutions (Note 7)
Total net lending (Note 8)
Debentures and other debt securities (Note 9)
Off-balance-sheet risks (Notes 8 and 20)
Security revaluation reserve (Notes 3-d and 3-e)
Government debt securities (Note 6)
Common stocks and other equity securities (Note 10)
Investments in non-Group companies (Note 11)
Pension provision (Notes 3-j and 20)
At Spanish companies
At foreign companies
Provision for property and equipment (Notes 3-h and 14)
Other provisions for contingencies and expenses (Note 20)
(*) Loan loss provisions
Provisions for specific risks
General-purpose provision
Country-risk provision
Provision for the statistical coverage of loan losses
g) Comparative information
Early retirements-
In 2004, 2003 and 2002 the Group offered certain employees the possibility of taking early retirement before the retirement age stipulated in the current collective labor agreement (Note 3-j). The total cost of the early retirements includes indemnities, deferred compensation and future contributions to external pension funds. To meet this commitment, the related provisions were recorded, in accordance with Rule 13.13 of Bank of Spain Circular 4/1991.
In 2004 the Group charged the total cost arising from the early retirement, amounting to €571,628 thousand (€371,558 thousand net of the related tax effect) to the “Extraordinary Losses” caption in the accompanying consolidated statement of income (Notes 20 and 28).
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In 2003 and 2002, as permitted by the last paragraph of Rule 13.13 of Bank of Spain Circular 4/1991, the Group recorded these provisions with a charge to the “Additional Paid-in Capital” and “Reserves” captions in the accompanying consolidated balance sheets as of December 31, 2003 and 2002 (Notes 3-j, 20 and 24), amounting to €519,620 thousand and €324,465 thousand, respectively, net of the related tax effect (which is estimated at €279,796 thousand and €174,712 thousand, respectively) and with a charge to the “Extraordinary Losses” caption in the accompanying 2003 and 2002 consolidated statements of income (Note 28), amounting to €410 thousand and €76,729 thousand, respectively. These transactions were authorized by the Shareholders’ Meeting of the Bank and by the Bank of Spain.
The economic crisis showed in 2002, has affected to the solvency and liquidity situation of Argentinian entities. Until 2003, the Group kept the accounting policy, established in 2001, which consisted in canceling the theoretical accounting value of the Banco Frances Group in the consolidated balance sheet. When in 2003, the socioeconomic environment showed an improvement and the law environmental has showed a stability, the Group has decided to carry out a homogenization of the Banco Frances Group entities, showing the contribution to the Group statement of income and balance sheet as of December 31, 2004, according to the Bank of Spain Circular 4/91. In this homogenization process the Group has valued the assets according to the criterion established in that Circular, allocating the funds that the Group had constituted to cover the investment theoretical accounting value when it is necessary (Note 20). It has not been necessary to constitute additional funds.
BBVA Brasil Group
The 2002 consolidated financial statements included the contribution of the BBVA Brasil Group, although the effects of the sale had been recorded as of December 31, 2002 (Note 4). In the 2003 consolidated financial statements, the BBVA Group recorded the earnings generated by the BBVA Brasil Group through the actual date of sale as earnings generated companies accounted for by the equity method, and, accordingly, comparison with the earnings of 2002, shows significant decreases in most captions of the consolidated statement of income.
Depreciation of the Latin American currencies
The macroeconomic developments in 2002, 2003 and 2004 in most Latin-American countries affected, among other variables, their currencies, which experienced a sharp devaluation against the euro. This devaluation particularly affected the consolidated balance sheets as of December 31, 2004, 2003 and 2002, since the year-end exchange rates were used, and the 2002, 2003 and 2004 consolidated statements of income, since average exchange rates were applied (Note 3-b).
The accounting principles and valuation standards applied in preparing the consolidated financial statements were as follows:
a) Accrual principle-
Revenues and expenses are recorded on an accrual basis for accounting purposes and the interest method is applied for transactions whose settlement periods exceed twelve months. However, in accordance with the principle of prudence and with Bank of Spain regulations, the interest earned on nonperforming loans, including interest subject to country risk in countries classified as “very doubtful”, “doubtful” or “experiencing temporary difficulties”, is not recognized until it is collected.
In accordance with banking practice in Spain, transactions are recorded as of the date they are made, which may differ from the value date as of which interest revenues and expenses are calculated.
The consolidated finance companies record the revenues and expenses arising from their regular financing and lease contracts over the accrual period by the interest method. Under this method, these revenues and expenses are recognized over the collection period on the basis of the principal amount outstanding.
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b) Foreign currency transactions-
The breakdowns by currency of several accounts and captions in these notes to consolidated financial statements include under the foreign currencies heading currencies other than the euro.
Assets, liabilities and futures transactions
Assets and liabilities in foreign currencies, including those of branches and subsidiaries abroad, and unmatured foreign currency purchases and sales arranged for hedging purposes have been translated to euros at the average year-end exchange rates in the Spanish spot foreign exchange market (through the exchange rate of the U.S. dollar in local markets, for currencies not traded on the Spanish market), except for:
The equivalent euro value of the assets and liabilities denominated in foreign currencies was, as of December 31, 2004, €90,357 million, and €100,237 million, respectively, (€88,470 million and €95,497 million, respectively as of December 31, 2003 and €102,210 million and €107,367 million, respectively, as of December 31, 2002).
Exchange differences
The exchange differences arising from application of the above-mentioned translation methods are recorded as follows:
Structural exchange positions
The Group’s general policy is to finance investments in foreign subsidiaries and capital assigned to branches abroad in the same currency as that of the investment, in order to eliminate any future risk of exchange differences arising from these transactions. However, the investments in countries whose currencies do not have a market enabling the Bank to obtain financing that is unlimited, lasting and stable at long term are financed in another currency. In 2002, 2003 and 2004 most of the financing was provided in euros.
Exchange differences arising from financing in currencies other than the euro and the investment currency, net of the amount hedged by specific derivative transactions, are charged or credited to Group income, whereas those relating to investments are recorded under the “Reserves at Consolidated Companies - Translation Differences” caption in the accompanying consolidated balance sheets. Based on this principle, €482 thousand was charged to the “Market Operations” caption in the accompanying consolidated statement of income (€2,796 thousand and €32,699 thousand, respectively, were credited to the “Market Operations” caption in the accompanying 2003 and 2002 consolidated statements of income) (Note 28-b).
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However, since the end of 2002, the exchange risk associated with most of the investments made in Mexico and Chile has been hedged by derivative transactions, and the variations are recorded as adjustments to the “Reserves at Consolidated Companies – Translation Differences” caption in the accompanying consolidated balance sheets.
Inflation
Certain subsidiaries (located in Mexico, Uruguay, Chile, Bolivia, Peru, and, through March 2003, Argentina) are subject to local regulations on adjustments for inflation, and, accordingly, record charges and credits in their statements of income to protect their net worth from the theoretical decline in value arising from inflation. These accounting entries are recorded under the “Extraordinary Income” and “Extraordinary Losses” captions in the accompanying consolidated statements of income (Note 28-g). The detail of the net amount of these items is as follows:
Extraordinary income
Argentina (*)
Extraordinary losses
c) Loan loss provisions (Note 2-f)-
The loan loss provisions are intended to cover the losses, if any, which might arise in the full recovery of all credit and off-balance-sheet risks assumed by the Group in the course of its financial business (Notes 7, 8 and 9). For presentation purposes, they are recorded as a reduction of the “Due from Credit Institutions”, “Total Net Lending” and “Debentures and Other Debt Securities” captions on the asset side of the accompanying consolidated balance sheets. The provisions to cover any losses on the Group’s off-balance-sheet risks are included under the “Provisions for Contingencies and Expenses - Other Provisions” caption on the liability side of the accompanying consolidated balance sheets (Note 20).
The loan loss provisions were determined on the basis of the following criteria:
General-purpose provision: in accordance with Bank of Spain regulations, an additional general-purpose provision, representing 1% of loans, fixed-income securities, contingent liabilities and nonperforming assets without mandatory coverage (0.5% in the case of certain mortgage transactions with full coverage), is set up to cover risks not specifically identified as problematic at the present time. The balance of the general-purpose loan loss provision is increased by provisions recorded with a charge to income and is decreased
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when the risk assets making up the calculation basis diminish with respect to the previous period and provisions are released (Note 8).
d) Government debt securities, debentures and other debt securities-
The securities comprising the Group’s fixed-income securities portfolio are classified as follows:
A securities revaluation reserve is recorded for the net difference with respect to the total market value of this portfolio, if lower, based on the year-end closing market prices in the case of listed securities, and on the present value at market interest rates on that date in the case of unlisted securities. The unrealized losses on securities sold to third parties under repurchase agreement are written down for the proportional part of the period from the expected repurchase date to the maturity date. Also, securities acquired to hedge other transactions at the same term and with fixed interest, which therefore are not exposed to interest rate risk, are recorded at acquisition cost.
The writedown of the listed fixed-income portfolio is charged to asset accrual accounts, which are presented together with the securities written down under the appropriate consolidated balance sheet captions, or to income in the case of permanent losses. As of December 31, 2004 and 2003, the balance of these accounts amounted to €81,356 thousand and €69,687 thousand, respectively (Note 9). As of December 31, 2002, these accrual accounts had no balance.
Bank of Spain Circular 4/1991 also requires that an additional securities revaluation reserve be recorded for the amount of the gains on the disposal of fixed-income securities in the available-for-sale portfolio, which is applied to the asset accrual account described in the preceding paragraph, up to the balance calculated therefor.
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e) Equity securities-
Securities in the trading portfolio, which includes the portions of the associated companies which are not held at long term, are stated at market price. The net differences arising from price fluctuations are recorded under the “Market Operations” caption in the accompanying consolidated statements of income.
Equity securities representing holdings in subsidiaries not fully consolidable or holdings of generally 20% or more in unlisted companies (3% if listed) which do not meet the conditions for proportional consolidation are accounted for by the equity method as indicated in Note 2-c, except for holdings for which hedging transactions were arranged to eliminate the equity price risk, which are valued at acquisition cost. The investments accounted for by the equity method were valued on the basis of the interim, to date unaudited, financial statements furnished by the companies.
Other equity securities are recorded in the consolidated balance sheets at the lower of cost, revalued where appropriate, or market. The market value of these securities was determined as follows:
The difference between acquisition cost and the amount calculated as indicated in the preceding paragraph, which may be offset by the annual increase in the underlying book values of the investee over a maximum period of twenty years, need not be written down.
The securities revaluation reserve is recorded to recognize the unrealized losses arising from application of the aforementioned methods, and is presented as a reduction of the balances of the “Common Stocks and Other Equity Securities” and “Investments in Non-Group Companies” captions on the asset side of the accompanying consolidated balance sheets (Notes 2-f, 10 and 11). This reserve is recorded with a charge to the “Market Operations” caption in the accompanying consolidated statements of income (Note 28).
Equity securities were revalued pursuant to the applicable enabling legislation on account revaluations or by the methods stipulated in the regulations on corporate mergers which were applied at the related merger dates (Note 24).
f) Intangible assets-
This caption in the accompanying consolidated balance sheets includes, among other items, the payments made to acquire computer applications, which are amortized over a maximum period of three years.
This caption also includes incorporation and preopening expenses, expenses of increase in capital carried out at the Bank and subsidiaries and the unamortized expenses of bond and other financial instrument issuances. These expenses are amortized in a maximum period of five years, except for the financial instrument issuance expenses, which are amortized over the life of each issue.
g) Consolidation goodwill and negative consolidation difference-
The positive differences between the acquisition cost of shares of subsidiaries or companies accounted for by the equity method (Note 2-c) and their underlying book value are recorded as goodwill, if they cannot be classified as additions to the value of specific assets of the acquired companies.
As this goodwill is deemed to persist, it is amortized on a straight-line basis from the acquisition date over the period during which it is considered that the underlying investments will contribute to obtaining income for the Group. The maximum amortization period is 20 years. In 2002 the group wrote off in full the goodwill resulting from its holdings in companies located in certain Latin-American countries, mainly BBVA Banco Continental, S.A., AFP Horizonte, S.A. (Perú), BBVA Colombia, S.A., BBVA Horizonte Pensiones y Cesantías, S.A. (Colombia) and BBVA Uruguay, S.A.. In 2004, following the acquisition of the percentage owned by the minority shareholders of Grupo Financiero BBVA Bancomer, which is described in Note 4, the Group revised, prospectively from January 1, 2004, the period
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over which the finance companies located in Mexico will contribute to generating income for the Group and extended the goodwill amortization period from 10 to 20 years (Note 13).
The unrealized gains assigned to specific assets are amortized, if appropriate, on the basis of their disposal or effective decline in value over a maximum period of ten years in the case of operating assets.
When the cost of acquisitions is lower than their underlying book value, a negative consolidation difference arises which is treated as a provision and may not be credited to income unless the investment in the capital stock of these companies is fully or partially disposed of or in the event of the unfavorable evolution of the results of these companies (Note 13).
h) Property and equipment-
Assets for own use-
Property and equipment are carried at cost, revalued where appropriate pursuant to the applicable enabling legislation (Note 24), net of the related accumulated depreciation. The buildings owned by certain of the Group companies which were involved in mergers were stated, pursuant to the applicable legislation, on the basis of the market prices on the related merger dates as determined by independent appraisers.
Depreciation of the Property and equipment is generally provided at the following depreciation rates:
Buildings
Furniture
Fixtures
Office and automation equipment
Revaluation surpluses are depreciated over the remaining years of useful life of the revalued assets.
Gains or losses on disposal of property and equipment are recorded under the “Extraordinary Income” or “Extraordinary Losses” captions, respectively, in the consolidated statements of income.
Assets received in payment of debts-
These assets are recorded at the lower of the book value of the assets used to acquire them or market value, net, initially, of any provisions covering the assets received, up to 25% of that value. In accordance with Bank of Spain regulations, additional provisions are recorded in the years following foreclosure of the assets based on their age, type of asset and appraisal by independent appraisers.
The provisions recorded with a charge to the “Extraordinary Losses” caption in the accompanying consolidated statements of income are presented as a reduction of the balance of the “Property and Equipment—Other Property” caption in the accompanying consolidated balance sheets (Notes 14 and 28-g).
i) Treasury stock-
The balance of the “Treasury Stock” caption in the accompanying consolidated balance sheets as of December 31, 2004, 2003 and 2002, relates to shares of Banco Bilbao Vizcaya Argentaria, S.A. owned by the Bank and by consolidated subsidiaries (Note 23). These shares are reflected at cost, net, where appropriate, of the allowance recorded to write them down to the lower of consolidated underlying book value or market price.
In 2004 the aforementioned allowance was recorded with a charge to the “Reserves” caption, amounting €17,367 thousand, which represents a change in accounting method with respect to 2003 and 2002, when this allowance was
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recorded with a charge to the “Losses on Group Transactions” caption in the accompanying consolidated statements of income. In 2004, 2003 and 2002, gains or losses arising from the disposal of Bank shares are recorded under the “Income on Group Transactions” or “Losses on Group Transactions” captions respectively, in the accompanying consolidated statements of income.
The treasury stock and shares of Group and associated companies that are acquired as a result of futures hedging transactions related to certain stock market indexes are valued at market price. Valuation differences are recorded under the “Market Operations” caption in the consolidated statement of income.
In accordance with the revised Spanish Corporations Law, a restricted reserve has been recorded for the net book value of the aforementioned treasury stock (Note 24).
The total Bank shares owned by the Bank and consolidated companies represented 0.0844%, 0.2343% and 0.3347% of the capital stock issued by the Bank as of December 31, 2004, 2003 and 2002 respectively. The subsidiaries not fully consolidable held 0.0032%, 0.0026% and 0.0061% of the Bank’s capital stock, as of those dates, respectively.
j) Pension commitments and other commitments to employees-
Pension commitments
In 2004, 2003 and 2002 the Group offered certain employees the possibility of taking early retirement before the age stipulated in the current collective labor agreement. 1,372, 1,944 and 1,439 employees availed themselves of this offer in 2004, 2003 and 2002, respectively. The total cost of these agreements was €571,628 thousand, €799,826 thousand and €575,906 thousand in 2004, 2003 and 2002 (Notes 20). To meet this commitment, the related provisions were recorded, in accordance with Rule 13 of Bank of Spain Circular 4/1991 (Notes 2-g and 20).
The commitments to this employee group from their normal retirement age are included in the Employee Welfare System, as described below.
The early retirement payments payable, which include the present value of the compensation and indemnities payable to and of the future contributions to the external pension funds of the personnel who took early retirement in 2004 and prior years, through their normal retirement date, amounted to €2,577,559 thousand (€2,392,907 thousand and €1,942,975 thousand as of December 31, 2003 and 2002, respectively), net of the payments of €466,413 thousand made in 2004 (€429,168 thousand and €407,153 thousand in 2003 and 2002, respectively), and are included under the “Provisions for Contingencies and Expenses - Pension Provision” caption in the accompanying consolidated balance sheets.
In addition to the above, there are other internal pension provisions amounting to €2,837 thousand as of December 31, 2004 (€3,009 thousand and €949 thousand, as of December 31, 2003 and 2002, respectively), which are not subject to the externalization process.
Certain Group entities abroad have pension and other commitments to their employees, the accrued liability of which amounted to €637,689 thousand, €598,539 thousand and €640,493 thousand as of December 31, 2004, 2003 and 2002, respectively, and is included under the “Provisions for Contingencies and Expenses—Pension Provision” caption in the accompanying consolidated balance sheets (Notes 20 and 2-g). €587,383 thousand, €552,556 thousand and €570,060 thousand of these amounts as of December 31, 2004, 2003 and 2002, respectively, related to provisions recorded by BBVA Bancomer, S.A., to cover accrued defined benefit pension commitments and long-service bonuses at the retirement date and to cover, from 2002, post-retirement occupational obligations regarding medical services. The shortfall for past services as of December 31, 2004, 2003 and 2002, resulting from the recording of the latter commitment amounted to €181,528 thousand, €171,854 thousand and €187,234 thousand (Note 15) and is amortized over the average remaining working life of the employee group. The actuarial studies to evaluate these commitments were performed on an individual basis and quantified using the projected unit credit method and the discount rates
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and mortality and disability rates authorized by the Mexican National Banking and Securities Commission. In 2004, 2003 and 2002, net charges of €44,821 thousand, €48,338 thousand and €32,016 thousand, respectively were made by BBVA Bancomer, S.A. in this connection and were recorded with a charge to the “General Administrative Expenses - Personnel Costs” caption in the accompanying consolidated statement of income.
Under the current collective labor agreement, Spanish banks are required to supplement the social security benefits received by employees or their beneficiary rightholders in the event of retirement (except for those hired after March 8, 1980), permanent disability, death of spouse or death of parent.
Since 2000, by virtue of the collective agreement on the Employee Welfare System dated November 14, 2000, all the commitments to serving and retired employees of the Group’s Spanish banks have been externalized and instrumented in external pension plans and insurance policies. This employee welfare system covers all employees, including those hired subsequent to March 8, 1980. The employee welfare system also includes the pension commitments and obligations to former directors of the Bank with executive functions, amounting to €79,883 thousand, €80,387 thousand and €80,477 thousand as of December 31, 2004, 2003 and 2002.
On December 29, 2003, a collective agreement was entered into whereby, inter alia, the defined-benefit retirement system applicable to certain Pension Plan groups is transformed into a new defined-contribution system. This agreement will came into force on January 1, 2004, and did not give rise to additional provisioning requirements for the Group.
The employee welfare system includes defined contribution commitments, the amounts of which are determined in each case as a percentage of certain compensation items and/or a preset annual amount, and defined benefit commitments that are covered by insurance policies. These latter commitments as of December 31, 2004, 2003 and 2002, were valued in accordance with the externalization contracts entered into by the Group’s Spanish banks and the insurance companies using PEM/F 2000 mortality tables (GRM/F 95 for the insurance policies between the external pension plans and the insurance companies) and discount rates lower than the internal rates of return on the investments assigned to cover them.
The status of the commitments covered by external pension plans as of December 31, 2004, 2003 and 2002, is as follows:
Pension commitments to retired employees (*)
External pension funds
Insurance contracts (mathematical reserves)
With insurance companies related to the Group
With unrelated insurance companies
Possible commitments to serving employees
Employees with full coverage of accrued and unaccrued possible commitments (*)
Other employees (**)
Insurance contracts with insurance companies (mathematical reserves) in the Group (***)
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The externalization process, in which new valuation assumptions were used, disclosed differences which represent the discounted present value of the contributions yet to be made to the external pension funds for possible pension commitments as of December 31, 2000. These amounts were calculated using discount rates of 3.15% for the insurance contracts and 5.64% for the external pension plans. The initial differences that arose were recorded with a charge to accrual accounts and are being amortized over a maximum period of fourteen years in the case of the external pension plans, and over nine years in the case of the insurance contracts, starting from 2000 in accordance with the stipulations of Bank of Spain Circular 5/2000 and as required by the transition regime established in current regulations. In turn, the initial differences were credited to the “Deposits” caption on the liability side of the accompanying consolidated balance sheets, reducing the balance for the payments made. For presentation purposes, the balances of these two items as of December 31, 2004, 2003 and 2002, are included at the net amount under the “Other Assets” caption in the consolidated balance sheets as of that date (Note 15).
The variations in 2004 in this connection were as follows:
Other assets - Differences in the pension fund
Balance at January 1, 2004
External pension plan
Insurance contracts
Amortization
Other variations
Balance at December 31, 2004
Deposits – Deferred contributions
Interest cost allocable:
Payments made:
Reduction due to assignment of investments:
Net balance at December 31, 2004 (Note 15)
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The variations in 2003 in this connection were as follows:
Balance at January 1, 2003
Balance at December 31, 2003
Net balance at December 31, 2003 (Note 15)
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The charges recorded in 2004, 2003 and 2002 to cover the aforementioned commitments are summarized as follows:
Detail by item-
Allocable interest cost of deferred contributions
Expense of contributions made in the year by Spanish banks in the Group to external pension funds and insurance companies-
Accrued in the year
Extraordinary
Expense of contributions made by other Group entities
Net charges by Spanish banks in the Group to in-house pension provisions
Net charges by other Group companies to in-house pension provisions
Detail by account-
Financial expenses – Customer deposits
Financial expenses - Cost allocable to the recorded pension provision (Notes 20 and 28-b)
General administrative expenses – Personnel costs-
Net charges to in-house pension provisions (Notes 20 and 28-c)
Contributions to external pension funds (Note 28-c)
Extraordinary losses-
Net extraordinary charges to in-house pension provisions (Note 20)
Other losses
Extraordinary income-
Other commitments to employees
All the employee stock option plans granted through 2000, except for the long-service bonuses, concluded in 2004 on expiration of the related right exercise date.
From 2001 to 2004 no new stock options were granted, except long-service bonuses in shares accrued by employees (to be settled when the employee completes 15, 25, 40 or 50 years’ service at Banco Bilbao Vizcaya Argentaria, S.A.).
The situation as regards performance on Long-service bonuses payable in shares to employees as of December 31, 2004, and the variations in 2004, 2003 and 2002 were as follows:
Nº Shares
at the end ofthe year
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In March 1999, pursuant to a resolution adopted by the Bank’s Shareholders’ Meeting on February 27, 1999, 32,871,301 new shares were issued at a price of €2.14 per share, similar to the average reference price of the bonus commitments to Group employees at that date, which they were allocated to cover, which included the bonus commitments for the years 1995 through 1998 and a portion of the accrued commitment relating to long-service bonuses. These shares were subscribed and paid in full by a non-Group company and, simultaneously, the Bank acquired a call option on these shares which can be exercised on any date, at one or several times, prior to December 31, 2011, at an exercise price equal to the share issue price, adjusted on the basis of the antidilution clauses. On various occasions since 1999 the call option was partially exercised to meet commitments to Group employees, a total of 28,044,656 shares being purchased. Accordingly, as of December 31, 2004, the Bank still held an option on a total of 4,826,645 shares (8,192,942 and 12,490,232 shares as of December 31, 2003 and 2002, respectively), at a price of €2.09 per share, after adjustment of the issue price as a result of the reductions in the par value in July 1999 and April 2000.
Moreover, the other accrued long-service bonus commitments (1,346,133, 1,325,680 and 1,900,000 shares in 2004, 2003 and 2002, respectively) had been hedged in full with call options and other futures transactions (Note 3-m).
In 2003 an insurance policy was arranged for €570 thousand to cover the pension commitments to former nonexecutive directors. This amount was recorded under the “Personnel Costs” caption in the 2003 statement of income.
k) Severance costs-
Under current Spanish labor legislation, companies are required to pay severance to employees terminated without just cause. There is no labor force reduction plan which would make it necessary to record a provision in this connection. However, as required by Bank of Spain Circular 5/2000, the Group recorded in-house provisions, with a charge to the “Extraordinary Losses” caption in the accompanying 2004, 2003, and 2002 consolidated statements of income, to cover, in accordance with the schedule established in that Circular, the contractual severance payments for terminations or dismissals additional to those provided for by current legislation on a general basis. As of December 31, 2004, 2003 and 2002, these provisions amounted to €57,910 thousand, €37,458 thousand and €37,490 thousand, respectively, and were recorded under the “Provisions for Contingencies and Expenses - Pension Provision” caption in the accompanying consolidated balance sheets (Note 20).
l) Corporate income tax and other taxes-
These captions in the consolidated statements of income include all the debits or credits arising from Spanish corporate income tax and those taxes of a similar nature of subsidiaries abroad, including both the amounts relating to the expense accrued in the year and those arising from adjustments to the amounts recorded in prior years (Note 25).
The expense for corporate income tax accrued each year is calculated on the basis of book income before taxes, increased or decreased, as appropriate, by the permanent differences from the income for tax purposes, i.e. differences between the taxable income and book income before taxes that do not reverse in subsequent periods. The tax assets arising from tax losses at subsidiaries (basically Latin-American companies) and prepaid taxes arising from timing differences are only capitalized if they will be recovered within a period of ten years (Note 15).
The tax benefit of tax credits for double taxation, tax relief and tax credits for certain activities or investments is treated as a reduction of the amount of corporate income tax for the year in which the tax credits are used. Entitlement to these tax credits is conditional upon compliance with the legally stipulated requirements.
m) Derivatives and other futures transactions-
These instruments include, inter alia, unmatured foreign currency purchase and sale transactions, unmatured securities purchase and sale transactions, financial futures on securities, on exchange rates and on interest rates, forward rate agreements, options on exchange rates, on securities and on interest rates and the various types of financial swaps.
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These transactions are basically carried out for hedging and overall management of the financial risks to which the Group is exposed.
In accordance with Bank of Spain regulations, transactions involving these products are recorded in memorandum accounts either for the future rights and commitments that might have a net worth effect, or for the balances that might be necessary to reflect the transactions, even if they did not have any effect on the Group’s net worth. Accordingly, the notional and/or contractual value of these products does not express the total credit or market risk assumed by the Group.
Also, the premiums paid and collected for options purchased and sold, respectively, must be recorded under the “Other Assets” and “Other Liabilities” captions in the accompanying consolidated balance sheets as an asset for the purchaser and as a liability for the writer (Note 15), until their exercise or maturity date.
Transactions whose objective and effect is to eliminate or significantly reduce currency, interest rate or price risks on asset and liability positions or on other transactions were treated as hedging transactions, provided that the hedged asset and the hedging transactions were identified explicitly from initiation of the latter. Similarly, transactions which, although not specifically assigned to a specific hedged item, form part of global or macrohedges used to reduce the risk to which the Group is exposed as a consequence of overall management of correlated assets, liabilities and other transactions, were also treated as hedging transactions.
As of December 31, 2004, 2003 and 2002, the Group had arranged share price risk and interest rate risk macrohedges consisting of securities listed on the main international stock markets and long-term deposit transactions, respectively. The security price macrohedges were valued at market price. The settlements relating to the interest rate macrohedge were recorded by the accrual method. These transactions are permanently subject to an integrated, prudent and consistent system of risk and earnings measurement, management and control enabling transactions to be monitored and identified. This system involves, for each macrohedge, the recording of provisions for credit, market and operational risk in accordance with banking practice for transactions of this type. As required by current legislation, each macrohedge transaction has been authorized by the Bank of Spain.
The gains or losses arising from these hedging transactions are recorded symmetrically to the revenues or costs of the hedged item, and the collections or payments made in settlements are recorded with a balancing entry under the “Other Assets” and “Other Liabilities” captions in the accompanying consolidated balance sheets (Note 15). Forward currency transactions classified as hedges are recorded for accounting purposes as described in Note 3-b.
Nonhedging transactions, which are also known as trading transactions, are valued in accordance with Bank of Spain regulations, based on the market on which they are arranged:
n) Assets and liabilities acquired or issued at a discount-
Assets and liabilities acquired or issued at a discount, except for marketable securities, are recorded at redemption value. The difference between this value and the amounts paid or received is recorded under the liability and asset “Accrual Accounts” captions in the consolidated balance sheets (Note 16).
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Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) is the Group’s parent company. Its individual financial statements are prepared on the basis of the accounting principles and methods described in Note 3, except for the valuation of the Bank’s direct holdings of 20% or more in unlisted companies and of 3% or more in listed companies, which, pursuant to Bank of Spain Circular 4/1991, are recorded at the lower of cost, revalued where appropriate, or market. The market value is deemed to be the underlying book value of these holdings, adjusted by the amount of the unrealized gains disclosed at the time of acquisition and still existing at the valuation date.
The Bank represented approximately 65.21% of the Group´s assets and 29.08% of pre-tax profits as of December 31, 2004 (63.94% and 49.5%, respectively, as of December 31, 2003 and 58.96% and 49.39%, respectively, as of December 31, 2002), after the related consolidation adjustments and eliminations.
Summarized below are the balance sheets of Banco Bilbao Vizcaya Argentaria, S.A. as of December 31, 2004, 2003 and 2002 and the statements of income for the years ended December 31, 2004, 2003 and 2002.
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BALANCE SHEETS AS OF DECEMBER 31, 2004, 2003 AND 2002 (SUMMARIZED)
- Thousands of euros -
LIABILITIES ANDEQUITY
CASH ON HAND AND DEPOSITS AT CENTRAL BANKS
DUE TO CREDIT INSTITUTIONS
GOVERNMENT DEBT SECURITIES
DEPOSITS
DUE FROM CREDIT INSTITUTIONS
MARKETABLE DEBT SECURITIES
TOTAL NET LENDING
OTHER LIABILITIES
DEBENTURES AND OTHER DEBT SECURITIES
ACCRUAL ACCOUNTS
COMMON STOCKS AND OTHER EQUITY SECURITIES
PROVISIONS FOR CONTINGENCIES AND EXPENSES
INVESTMENTS IN NON-GROUP COMPANIES
INVESTMENTS IN GROUP COMPANIES
INCOME FOR THE YEAR
INTANGIBLE ASSETS
SUBORDINATED DEBT
PROPERTY AND EQUIPMENT
CAPITAL STOCK
TREASURY STOCK
ADDITIONAL PAID-IN CAPITAL
OTHER ASSETS
RESERVES
REVALUATION RESERVES
MEMORANDUM ACCOUNTS
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STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (SUMMARIZED)
FINANCIAL REVENUES
FINANCIAL EXPENSES
INCOME FROM EQUITIES PORTFOLIO
FEES COLLECTED
FEES PAID
MARKET OPERATIONS
OTHER OPERATING INCOME
GENERAL ADMINISTRATIVE EXPENSES
DEPRECIATION AND AMORTIZATION
NET LOAN LOSS PROVISIONS
NET SECURITIES WRITEDOWNS
EXTRAORDINARY INCOME
EXTRAORDINARY LOSSES
CORPORATE INCOME TAX AND OTHER TAXES
NET INCOME (Note 5)
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STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (SUMMARIZED)
APPLICATION OF FUNDS
SOURCE OF FUNDS
DIVIDENDS PAID
FROM OPERATIONS:
Net income
Net provision for asset writedown and other special provisions
Losses on sales of investments and fixed assets
CREDITORS
Gains on sales of investments and fixed assets
CAPITAL INCREASES
NET PURCHASE OF TREASURY STOCK
NET SALE OF TREASURY STOCK
FINANCING, NET OF INVESTMENT, AT BANK OF SPAIN AND CREDIT AND SAVINGS INSTITUTIONS
DEBT SECURITIES
SHORT-TERM EQUITY SECURITIES
MARKETABLE SECURITIES
ACQUISITION OF LONG-TERM INVESTMENTS—
SALE OF LONG-TERM INVESTMENTS-
Purchase of investments in Group and associated companies
Sale of investments in Group and associated companies
Additions to property and equipment and intangible assets
Sale of property and equipment
OTHER LIABILITY ITEMS LESS ASSET ITEMS
TOTAL FUNDS APPLIED
TOTAL FUNDS OBTAINED
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The total assets and financial income of the most subsidiaries of the Group as of December 31, 2004, 2003 and 2002 are as follows:
BBVA Bancomer Group
BBVA Chile Group
BBVA Puerto Rico
BBVA Banco Francés Group
BBVA Banco Provincial Group
BBVA Banco Continental Group
BBVA Colombia Group
BBV Brasil Group
The subsidiaries fully consolidated as of December 31, 2004, 2003 and 2002 which, based on the information available, were more than 5% owned by non-Group shareholders, were as follows:
As of December 31, 2004:
As of December 31, 2003:
As of December 31, 2002:
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As of December 31, 2002, there were no Spanish or foreign credit institutions outside the Group with significant holdings in fully consolidated companies.
Based on the information available as of December 31, 2004 and 2003, foreign credit institutions outside the Group held significant investments in the following fully consolidated companies:
The main changes in the consolidated Group and the situation as of December 31, 2004, were as follows:
BBVA-Bancomer Group (Mexico)-
Grupo Financiero BBV-Probursa, S.A. de C.V. and the companies in its group, including most notably Banco Bilbao Vizcaya Mexico, S.A., joined the Group in July 1995.
In the first half of 2000, it was resolved to merge Grupo Financiero BBV-Probursa, S.A. de C.V. and Grupo Financiero BBVA Bancomer, S.A. de C.V. (the holdings of which include most notably 100% of BBVA Bancomer, S.A. and 51% of Administradora de Fondos para el Retiro Bancomer, S.A. de C.V. (AFORE Bancomer). This merger was carried out in July 2000, after the Group subscribed in June to a capital increase of US$ 1,400 million at Grupo Financiero BBV-Probursa, S.A. de C.V.
The Group’s holding in Grupo Financiero BBVA Bancomer, S.A. de C.V. resulting from the merger, following open-market acquisitions of shares amounting to approximately US$ 325 million, stood at 36.6% as of December 31, 2000.
At the end of the year 2000 an agreement was reached with Bank of Montreal to acquire an additional 2.2% of Grupo Financiero BBVA Bancomer, S.A. de C.V. for approximately US$ 125 million, in a transaction which was performed in 2001. Also, on April 4, 2001, the Group reached an agreement with Bank of Montreal to purchase 9% of its holding in Grupo Financiero BBVA Bancomer, S.A. de C.V. (812 million shares) which signified an investment of US$ 558 million. The transaction was performed in two tranches: the first consisting of 500 million shares on April 5, 2001, raised the holding to 45%, and the second, consisting of 312 million shares, raised the holding in Grupo Financiero BBVA Bancomer, S.A. de C.V. to 48%. Also, in 2001 other acquisitions amounting to US$ 140 million were made, leaving the total holding in Grupo Financiero BBVA Bancomer S.A. de C.V. at 48.76% as of December 31, 2001. The increase in the total goodwill recorded in relation to Grupo Financiero BBVA Bancomer S.A. de C.V. in 2001 amounted to €739 million.
As part of the placement of Grupo Financiero BBVA Bancomer S.A. de C.V. shares by the Government of Mexico in 2002, BBVA acquired approximately 276 million shares representing 3% of the entity’s capital stock for €240 million. Additionally, in November 2002 the Group acquired a further 2.5% holding in the capital stock of BBVA Bancomer for €175 million, thus raising the Bank’s ownership interest to 54.67% as of December 31, 2002. The increase in goodwill recorded in 2002 was €338 millon.
Lastly, in 2003 the Group made additional purchases of 4.76% of the capital stock of BBVA Bancomer for a total of €304 million, leaving the Bank’s holding at 59.43% as of December 31, 2003. The increase in goodwill recorded in 2003 was €161 millon (Note 13).
On March 20, 2004, the BBVA Group completed the tender offer on 40.6% of the capital stock of Grupo Financiero BBVA Bancomer, S.A. de C.V. The final number of shares presented in the offer and accepted by BBVA was 3,660,295,210, which represent 39.45% of the capital stock of the Mexican entity. Following the acquisition of these shares through the tender offer, the ownership interest held by BBVA in the capital of Grupo Financiero BBVA
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Bancomer, S.A. de C.V. was 98.88%. Lastly, as of December 31, 2004, as a result of the purchase of shares subsisting in the market, BBVA’s holding in Grupo Financiero BBVA Bancomer, S.A. de C.V. increased to 99.70%. The increase in goodwill recorded in 2004 was €2,116.7 million (Note 13).
BBVA Banco Francés (Argentina)-
In December 1996, the Group acquired 30% of BBVA Banco Francés, S.A. (formerly Banco Francés Río de la Plata, S.A.) and took on its management. From that date through December 31, 2001, additional acquisitions were made to increase the Group’s holding in this entity to the 68.25% as of December 31, 2001. The total cost of this holding was US$ 1,179 million.
On May 30, 2002, BBVA Banco Francés reached an agreement with the Argentine authorities to increase capital, for which BBVA would contribute the subordinated marketable debentures of BBVA Banco Francés held by it amounting to US$ 130 million and a financial loan granted to BBVA Banco Francés amounting to US$ 79 million. The preemptive subscription period ended on December 26, 2002. In accordance with the issue terms, a total of 158.4 million new shares were issued, which increased the Bank’s capital stock to 368.1 million shares. The Group, as the majority shareholder, increased its ownership interest in the capital of BBVA Banco Francés, S.A. from 68.25% to 79.6% as a result of this capital increase. The resulting goodwill amounted to €34,786 thousand and was written off with a charge to the 2002 consolidated statement of income (Note 13).
As of December 31, 2003, the holding was 79.6%.
As of January 21, 2004, BBVA Banco Francés, S.A. presented the new formulation of the regularization and reorganization plan, which begun in 2002, requested by the authorities. The new plan considered, mainly, the sale of its subsidiary BBVA Banco Francés (Cayman) Ltd. to BBVA, S.A., carried out the last March 18, and the capitalization of a € 78 million loan granted by BBVA, S.A. to BBVA Banco Francés, S.A.
In compliance with the commitment thus assumed, on April 22, 2004, the Shareholders’ Meeting of BBVA Banco Francés. S.A. authorized a capital increase with a par value of ARP 385 million, which has been formally executed on October 2004. The Bank subscribed to, and paid, the capital increase carried out at BBVA Banco Frances, S.A. through the conversion into equity of a $78 million loan it had granted to this investee.
As of December 31, 2004, the holding was 76.1%.
Consolidar Group (Argentina)-
The Consolidar Group joined the Group in October 1997, when a 63.33% ownership interest was reached through BBVA Banco Francés.
As of December 31, 2002, 2003 and 2004, the Group held all the capital stock of Consolidar Administradora de Fondos de Jubilación y Pensiones (AFJP), S.A., Consolidar Cía de Seguros de Vida, S.A. and Consolidar Seguros de Retiro, S.A. (through Banco Francés, in percentages of between 53.89%, 65,96% and 66.67%, respectively).
Banco Bilbao Vizcaya Argentaria Puerto Rico, S.A.-
In July 1998 BBV Puerto Rico absorbed PonceBank, an entity with total assets of US$ 1,095 million, through a capital increase of US$ 166 million. Also in 1998, BBV Puerto Rico acquired the assets and liabilities of Chase Manhattan Bank in Puerto Rico for a disbursement of US$ 50 million.
In March 2000, Citibank’s automobile loan portfolio in Puerto Rico was acquired for a disbursement of US$ 31 million additional to the adjusted net value of the loans.
As of December 31, 2003 and 2004, the holding was 100%.
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BBVA Group (Chile)-
In September 1998, the Group acquired a 44% holding in Banco BHIF, S.A., currently BBVA Chile, S.A., and assumed the management of the group headed by this Chilean financial institution. In 1999 additional shares were acquired, bringing the Group’s total holding in this entity to 53.3% as of December 31, 1999. In September 2000 the Group completed the contribution of the capital subscribed in September 1998, with an amount of US$ 108 million, which brought the Group’s holding to 62.6% as of December 2000. As of December 2002, 2003 and 2004, the Group’s holding in BBVA Chile, S.A. was 66.098%, 66.27% and 66.26%, respectively.
AFP Provida, S.A. (Chile)-
On July 1, 1999, the Group acquired a 41.17% holding in, and assumed the management of, Administradora de Fondos de Pensiones Provida, S.A. This acquisition was undertaken through the issue of 19,780,108 new shares resolved by the Special Shareholders’ Meeting on June 30, 1999. These new shares were exchanged for all the shares of the companies that owned the aforementioned holding in AFP Provida, S.A. (Corp Group Pensions Ltd. and Brookline Investment Ltd.). Also, the Group made further investments in AFP Provida, mainly through the majority subscription to a capital increase carried out by this company in October 1999, and open-market acquisitions in 2001 and 2000. The Group’s holding as of December 31, 2004, 2003 and 2002, to 64.32%.
BBVA Banco Provincial Group (Venezuela)-
In March 1997, the Group acquired 40% of the capital stock of Banco Provincial, S.A. and higher holdings in the other Provincial Group companies, thereby assuming management of the group. Additional acquisitions were made in subsequent years which raised the Bank’s holding in the Provincial Group to 55.53% 55.59% and 55.60% as of December 31, 2002, 2003 and 2004, respectively.
BBVA Banco Continental Group (Peru)-
In April 1995, the Group acquired a 75% holding in the capital stock of Banco Continental, S.A. through Holding Continental, S.A.
On November 26, 2002, BBVA, as the owner of 50% of the capital stock of the Peruvian company Holding Continental, S.A., subscribed to a capital increase at this entity amounting to US$ 10 million. This capital increase will be used to finance the tender offer to acquire the shares of Banco Continental which are not currently held by it (143,713,997 shares) at 1.59 soles per share. On November 27, 2002, Holding Continental, S.A. submitted this transaction to the Lima Stock Exchange and to the related National Companies and Securities Supervisory Commission. The tender offer resulted in the acquisition of 8.84% of the capital stock of Banco Continental. In 2002 Holding Continental and its subsidiaries held 91.51% of the aforementioned Bank. The holding in this company was increased to 92.01% and 92,04% in 2003 and 2004, respectively.
BBVA Colombia Group -
In August 1996, the Group acquired 40% of the common stock (equal to 35.1% of the total capital) of Banco Ganadero, S.A. (currently BBVA Colombia, S.A.). In 2000 this entity carried out a major financial restructuring and strengthening process which included a capital increase of approximately US$ 254 million, substantially all of which was subscribed by the Group. This capital increase, together with various additional acquisitions resulting in US$ 14 million of disbursements, raised the Group’s holding in BBVA Banco Ganadero, S.A. to 85.56% as of December 31, 2000. On January 23, 2001, the Bank’s Board of Directors resolved to launch a tender offer to purchase all the shares of BBVA Banco Ganadero, S.A. The tender offer took place on April 9, 2001, and gave rise to a disbursement of US$ 44.4 million and increased the Group’s holding in BBVA Banco Ganadero, S.A. to 95.36%. This percentage of ownership was maintained as of December 31, 2002. As of December 31, 2003 and 2004, the holding was 95.37%.
BBV Brasil Group-
In August 1998, the Group acquired control of Banco Excel Económico, S.A. (Banco Bilbao Vizcaya Argentaria Brasil, S.A.- BBV Brasil)
In 2002 the Group decided to reconsider the business model implemented in Brazil. As a result of the new approach, a strategic agreement was reached in that year with Banco Bradesco, S.A., which was executed on January 10, 2003. The main aspects of the agreement were as follows:
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Once the related “Due Diligence” reviews were completed and the necessary regulators’ approval had been obtained, the agreement was executed on June 9, 2003.
Variations in the Group in 2004-
The most noteworthy transactions in 2004, as of the date of publication of these notes to consolidated financial statements, were as follows:
Variations in the Group in 2003-
The most significant transactions in 2003 were as follows:
The above mentioned increase of capital integrates the Consumer’s Lending Business in Uno-e Bank, S.A. and as a result of the referred capital increase, BBVA Group and Terra hold stakes in Uno-e Bank S.A. share capital of 67% and 33%, respectively.
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Variations in the Group in 2002-
The most noteworthy transactions in 2002 were as follows:
In 2004, the Board of Directors of Banco Bilbao Vizcaya Argentaria, S.A. resolved to pay the shareholders three interim dividends out of 2004 income, amounting to a total of €0.30 gross per share. The aggregate amount of the interim dividends declared as of December 31, 2004, net of the amount collected and to be collected by the consolidable Group companies, was €1,015,192 thousand and is recorded under the “Other Assets” caption in the related consolidated balance sheet (Note 15). The last of the aforementioned interim dividends, amounts to €0.10 gross per share, paid to the shareholders on January 10, 2005, and was recorded under the “Other Liabilities – Payment Obligations” caption in the accompanying consolidated balance sheet as of December 31, 2004 (Note 15).
The projected 2004 accounting statements prepared by Banco Bilbao Vizcaya Argentaria, S.A. in accordance with legal requirements, disclosing the existence of sufficient liquidity for distribution of the interim dividends, were as follows:
Interim dividend-
Income at each of the stated dates, after the provision for corporate income tax
Interim dividends distributed
Maximum amount of possible distribution
Proposed amount of interim dividend
The Bank’s Board of Directors will propose to the Shareholders’ Meeting that a final dividend of €0,142 per share be paid out of 2004 income. Based on the number of shares representing the capital stock as of December 31, 2004 (Note 23), the final dividend would amount to €481,501 thousand and income would be distributed as follows:
2004 net income (Note 4)
Allocation to:
Dividends (Note 2-d)
- Interim dividend
- Final dividend
Voluntary reserves
Legal reserves
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The balances of this caption in the accompanying consolidated balance sheets are made up as follows:
Book
Value
Fixed-income portfolio:
Held-to-maturity portfolio-
Listed government debt securities
Available-for-sale portfolio-
Treasury bills
Other listed book-entry debt securities
Other listed securities
Securities revaluation reserve (Note 2-f)
Trading portfolio-
Other book-entry debt securities
There were no securities transferred from the trading portfolio to the available-for-sale portfolio at market prices in 2004.
In 2004, 2003 and 2002, securities amounting to €23,198 thousand, €717,080 thousand and €1,811,502 thousand, respectively, were transferred from the trading portfolio to the available-for-sale portfolio at market prices.
The acquisition cost of securities assigned to the trading portfolio amounted to €6,475,644 thousand, €5,610,704 thousand and €7,378,856 thousand as of December 31, 2004, 2003 and 2002, respectively.
The variations in 2004 y 2003 in the balance of this caption in the accompanying consolidated balance sheets were as follows:
Thousands
of Euros
Balance at year-end 2002
Redemptions
Balance at year-end 2003
Balance at year-end 2004
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The average annual interest rate on Treasury bills in 2004 was 2,04% (2.11% and 2.82% in 2003 and 2002, respectively). As of December 31, 2004, 2003 and 2002, €3,267,781 thousand, €5,282,381 thousand and €5,991,369 thousand, respectively, of these assets and of those acquired under resale agreement from credit institutions (Note 7) and from customers (Note 8) had been sold under repurchase agreement by the Group to other financial intermediaries (Note 17) and to customers (Note 18).
The nominal interest rates on listed government debt securities ranged from 10.05% to 1.62% at 2004 year end (from 10.15% to 3.20% at 2003 year end and from 10.9% to 3.25% at 2002 year end). As of December 31, 2004, 2003 and 2002, €16,644,967 thousand, €17,980,643 thousand and €15,185,661 thousand (effective amount) respectively of these securities and of those acquired under resale agreement from credit institutions (Note 7) and from customers (Note 8) had been sold under repurchase agreement by the Group to the Bank of Spain and other financial intermediaries (Note 17) and to customers (Note 18).
The breakdown of this caption of the accompanying consolidated Balance Sheet, by maturity, as of December 31, 2004, 2003 and 2002, disregarding the securities revaluation reserve, is as follows:
3 Months
to 1 Year
Balances at December 31, 2004-
Trading portfolio
Balances at December 31, 2003-
Balances at December 31, 2002-
The breakdown of the balances of this caption in the accompanying consolidated balance sheets, by currency and type, is as follows:
By currency:
In euros
In foreign currencies
By type:
Current accounts-
Other accounts
Other-
Deposits at credit and financial institutions
Assets acquired under resale agreement (Notes 6, 8, 17 and 18)
Loan loss provisions (Notes 2-f, 3-c and 8)
Country-risk provisions (Notes 2-f, 3-c and 8)
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As of December 31, 2004, 2003 and 2002, the foregoing “Country-Risk Provisions” account included €25,249 thousand, €162,321 thousand and €93,322 thousand, respectively, relating to provisions recorded to cover intercompany country-risk positions at credit institutions (Notes 2-c and 3-c).
The detail, by maturity, of the balances of the “Due from Credit Institutions—Other” caption (except for “Other Accounts”) in the accompanying consolidated balance sheets, disregarding the loan loss and country risk provisions, and the average interest rates for each year are as follows:
Assets acquired under resale agreement
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The detail, by currency and borrower sector, of the balances of this caption in the accompanying consolidated balance sheets is as follows:
By sector:
Trade and finance
Lease
Total resident borrowers
Europe
USA
Loan loss provisions (Notes 2-f and 3-c)
Country-risk provisions (Notes 2-f and 3-c)
The detail, by maturity, loan type and status, of this caption in the accompanying consolidated balance sheets, disregarding the balance of the “Loan Loss Provisions” and “Country-Risk Provisions” accounts in the foregoing detail, is as follows:
By maturity:
Up to 3 months
3 months to 1 year
1 to 5 years
Over 5 years
By loan type and status:
Commercial bills
Financial bills
Assets acquired under resale agreement (Notes 6, 7, 17 and 18)
Other term loans
Demand and other loans
Financial leases
Nonperforming loans
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The variations in 2004, 2003 and 2002 in the balance of the “Nonperforming Loans” caption included under this heading in the accompanying consolidated balance sheets were as follows:
Beginning balance
Additions
Transfers to bad debts
Exchange differences and other
Ending balance
As of December 31, 2004, 2003 and 2002, the face amount of the assets, basically loans and credits pledged as security for own and third-party obligations, amounted to €24,253,873 thousand, €17,367,909 thousand and €18,190,848 thousand, respectively, and related basically to the pledge of certain assets as security for financing facilities with the Bank of Spain (Note 17) and to a portion of the assets assigned to mortgage bond issues, which pursuant to the Mortgage Market Law are admitted as security for obligations to third parties.
As of December 31, 2004, 2003 and 2002, there were no loans to customers without fixed maturity dates.
As of December 31, 2004, 2003 and 2002, €3,990,531 thousand, €2,586,891 thousand and €2,910,899 thousand, respectively, of loans were transferred to securitization funds.
Assets under financial lease contracts are reflected in the “Financial Leases” account in the foregoing detail at the principal amount of the unmatured lease payments, plus the residual value applicable for purchase option purposes, excluding financial charges and VAT.
As of December 31, 2004, 2003 and 2002, the outstanding amounts of the loans granted to employees and customers for the acquisition of shares of Banco Bilbao Vizcaya Argentaria, S.A. were €12,139 thousand, €13,269 thousand and €17,286 thousand, respectively.
The advances and loans granted to Bank directors as of December 31, 2004, 2003 and 2002, totaled €128 thousand, €261 thousand and €1,099 thousand, respectively, and earned annual interest between 4% and 5%. As of December 31, 2004, 2003 and 2002, no guarantees had been provided for them.
The variations in 2004, 2003 and 2002 in the overall balance of the “Loan Loss Provisions” and “Country-Risk Provisions” accounts in the above detail and of the provisions allocated to credit institutions (Note 7) and to fixed-income securities (Note 9) were as follows:
Net charge for the year:
Nonperforming loan provision
Country-risk provision (Note 2-c)
Variations in the consolidable Group (Note 4)
Transfer to loan writeoffs
Transfer to foreclosed asset provisions (Note 14)
Other variations:
Transfer to provision for off-balance-sheet risks (Note 20)
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The €202,071 thousand, €227,179 thousand and €207,677 thousand of written-off loans recovered in 2004, 2003 and 2002, respectively are presented net of the balances of the “Net Loan Loss Provisions” caption in the accompanying consolidated statements of income. This caption also includes the write offs of loans classified as bad debts, which amounted to €147,916 thousand, €161,079 thousand and €208,857 thousand in 2004, 2003 and 2002, respectively.
The detail of the total risk exposure as of December 31, 2004, 2003 and 2002, to third parties outside the Group in countries experiencing differing degrees of debt-servicing difficulty (country-risk) and of the provisions recorded for coverage thereof, which are included in the loan loss provisions (Note 3-c), is as follows:
Country-risk
Provision recorded (*)
Percentage of coverage
The country-risk amount as of December 31, 2004, 2003 and 2002, does not include assets for which insurance policies have been taken out with third parties that include coverage of the risk of confiscation, expropriation, nationalization, nontransfer, nonconvertibility and, if appropriate, war and political violence. The sum insured as of December 31, 2004, 2003 and 2002, amounted to US$ 153 million, US$ 466 million and US$ 584 million, respectively (approximately €113 million, €369 million, €557 million, respectively).
Also, pursuant to current Bank of Spain regulations, the provision for off-balance-sheet risk losses, recorded under the “Provisions for Contingencies and Expenses - Other Provisions” caption (Notes 2-f and 20) on the liability side of the accompanying consolidated balance sheets amounted to €230,496 thousand, €209,270 thousand and €271,545 thousand, respectively, as of December 31, 2004, 2003 and 2002.
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The breakdown, by currency, issuer sector, listing status and type, of the balances of this caption in the accompanying consolidated balance sheets, is as follows:
Resident public sector
Resident credit institutions
Other non-resident sectors
Loan loss and country-risk provisions (Notes 2-f, 3-c and 8)
By listing status:
Listed
Unlisted
The breakdown, by maturity, of the balance of the fixed-income portfolio classified as available-for-sale and held-to-maturity in the accompanying consolidated balance sheets in 2004 and 2003, disregarding the “Securities Revaluation Reserve” and the “Loan Loss and Country-Risk Provisions” accounts is as follows:
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In 2004 securities in the trading portfolio amounting to €1,492,895 thousand (€893,242 thousand and €1,054,336 thousand in 2003 and 2002, respectively) were transferred to the available-for-sale portfolio at market prices.
The acquisition cost of the securities assigned to the trading portfolio was €20,937,948 thousand as of December 31, 2004 (€19,870,277 thousand and €19,598,881 thousand as of December 31, 2003 and 2002, respectively).
As of December 31, 2004, 2003 and 2002, the market value net of affected hedging operations of the debentures and other debt securities included in the available-for-sale portfolio amounted to €29,419,949 thousand, €32,590,300 thousand and €28,971,860 thousand, respectively.
The market value net of affected hedging operations of the securities assigned to the held-to-maturity portfolio amounted €2,395,803 thousand, €542,590 thousand and €561,760 thousand as of December 31, 2004, 2003 and 2021, respectively.
As of December 31, 2004, the face value of the securities which were securing financing lines assigned by the Bank of Spain and other central banks in the Group amounted to €11,091,984 thousand (€12,231,516 thousand and €7,091,312 thousand as of December 31, 2003 and 2002, respectively).
As of December 31, 2004, 2003 and 2002, a portion of the debt securities on hand had been sold under repurchase agreement basically to private-sector depositors and is recorded under the “Deposits - Other Deposits” caption in the accompanying consolidated balance sheets (Note 18).
The balance of the “Available-for-Sale Portfolio - Other Nonresident Sectors” caption includes promissory notes issued by the Banking Fund for the Protection of Savings (FOBAPROA) in Mexico, now the Banking Institute for the Protection of Savings (IPAB). These promissory notes arose as part of the measures adopted by the Mexican government as a result of the banking crisis suffered due to the economic situation in Mexico at the end of 1994 and in 1995. Under certain regulations, the banks transferred to the Mexican government a portion of the loan portfolio with payment difficulties. These transactions were structured as a transfer of future rights to the flows generated by the loans. In exchange for these rights, the credit institutions received nontransferable FOBAPROA promissory notes of an amount equal to the net book value (net of the provisions) of the assets subject to the scheme. As of December 31, 2004, 2003 and 2002, these promissory notes amounted to €7,373,416 thousand, €9,030,338 thousand and €11,173,894 thousand, respectively. The promissory notes earn capitalizable interest and are payable through maturity in 2005. The interest on these promissory notes is recorded under the “Financial Revenues” caption in the accompanying consolidated statements of income. In accordance with the terms established in the agreements with FOBAPROA, Grupo Financiero BBVA Bancomer is responsible for 25% of the losses arising from the difference between the amount of the FOBAPROA promissory notes at the commencement of the transaction plus the accumulated accrued interest and the recoveries of the loans subject to the program. This contingency was written off.
On July 12, 2004, Grupo Financiero BBVA Bancomer, S.A. de C.V. and BBVA Bancomer, S.A. entered into an agreement with the Banking Institute for the Protection of Savings (IPAB) whereby the promissory notes issued by the Fund for the Protection of Savings (FOBAPROA) were exchanged for IPAB debentures.
This agreement envisaged the performance of management, identity of objective, existence and legitimacy (MEL) audits and the conclusion of the various legal proceedings between the parties. Also, BBVA Bancomer, S.A. agreed to acquire from FOBAPROA related receivables amounting to 3,264 million pesos, for which an allowance of 1,128 million mexican pesos was recorded.
The variations in 2004, 2003 and 2002 in the balances of this caption in the accompanying consolidated balance sheets, disregarding the “Securities Revaluation Reserve” and the “Loan Loss Provisions”, were as follows:
Sales and redemptions
Transfers and other
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On the other hand, the variations in the balance of the “Securities Revaluation Reserve” account in 2004, 2003 and 2002 were as follows:
Provisions with a charge to asset accrual accounts (Note 3-d)
This caption in the accompanying consolidated balance sheets includes the shares of companies generally less than 20% owned (less than 3% if listed), and units in mutual funds. The detail of the balances of this caption, by currency and listing status, is as follows:
Securities revaluation reserve (Notes 2-f and 3-e)
The variations in 2004, 2003 and 2002 in the balances of this caption in the accompanying consolidated balance sheets, disregarding the securities revaluation reserve, were as follows:
Exhibit IV lists the Group’s direct or indirect acquisitions of holdings in companies, the percentages of ownership acquired net of subsequent sales, and the notification dates thereof, in compliance with the provisions of Article 86 of the Corporations Law and Article 53 of Securities Market Law 24/1988.
As of December 31, 2004, 2003 and 2002, the market value of the shares and other equity securities included under this caption exceeded their book value by €108,985 thousand, €104,680 thousand and €125,789 thousand, respectively.
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The acquisition cost of the securities assigned to the trading portfolio amounted to €2,767,834 thousand, €1,943,149 thousand and €942,194 thousand as of December 31, 2004, 2003 and 2002, respectively.
The variations in the balances of the “Securities Revaluation Reserve” account in 2004, 2003 and 2002 were as follows:
Net charge for the year
Amount used
Transfer and other
This caption in the accompanying consolidated balance sheets reflects the ownership interests in the capital of other companies which, although not constituting a single decision-making unit, have a lasting relationship with the Group pursuant to Article 185.2 of the Corporations Law and Bank of Spain Circular 4/1991, which generally range from 20% (3% if listed) to 50%.
The “Other Investments in Associated Companies” account in the following table includes the holdings in companies acquired by the Group but not intended to be held at long-term and the holdings for which hedging futures transactions have been arranged (Note 2-c).
The detail of the balances of this caption in the accompanying consolidated balance sheets is as follows:
By type of investment:
Long-term investments
Other investments in associated companies
€986,518 thousand, €889,243 thousand and €1,024,136 thousand of the foregoing balances as of December 31, 2004, 2003 and 2002, respectively, related to investments in credit institutions, basically Banca Nazionale del Lavoro, S.p.A. and Banco Bradesco, S.A., in 2004, Banca Nazionale del Lavoro, S.p.A., Banco Bradesco, S.A. and Banco Atlántico, S.A. in 2003 and Banca Nazionale del Lavoro, S.p.A., Credit Lyonnais, S.A., Banco Atlántico, S.A. and Wafabank, S.A. in 2002.
Exhibit II lists the main associated companies, showing the percentages of direct and indirect ownership, the book values of these investments and other relevant information.
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The variations in the balances of this caption in the accompanying 2004, 2003 and 2002 consolidated balance sheets, disregarding the securities revaluation reserve, were as follows:
Capital increase and purchases
First-time consolidation differences (Note 13), transfers (Note 12) and other
Year-end balance
The most notable transactions in 2004, 2003 and 2002 were as follows:
Investments-
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Divestments-
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The gains and losses obtained on the aforementioned transactions are recorded under the “Income on Group Transactions” and “Losses on Group Transactions” captions, respectively, in the accompanying 2004, 2003 and 2002 consolidated statements of income.
Exhibit IV lists the notifications by the Group in compliance with Article 86 of the Corporations Law and Article 53 of Securities Market Law 24/1988.
As of December 31, 2004 and 2003, the market price of the shares and other equity securities included in this caption of the accompanying consolidated balance sheets exceeded their net book value by approximately €2,090,674 thousand and €1,319,748 thousand, respectively, after taking into account the related goodwill, negative consolidation differences and hedges of certain holdings. As of December 31, 2002, the market price of the shares and other equity securities included in this caption of the accompanying consolidated balance sheets was lower than their net book value by approximately €159,496 thousand (Note 13).
Charge for the year
Transfer to common stocks and other equity securities
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This caption in the accompanying consolidated balance sheets reflects the investments in subsidiaries, which are generally owned in more than 50%, and were not fully consolidated because their business activities are not directly related with those of the Group.
The breakdown, by currency and listing status, of the balances of this caption in the accompanying consolidated balance sheets is as follows:
Exhibit III presents relevant information about the companies comprising the balance of this caption in the accompanying consolidated balance sheets.
The variations in 2004, 2003 and 2002 in the balance of this caption in the accompanying consolidated balance sheets were as follows:
Capital increases and purchases
Transfers (Note 11) and other
On December 27, 2002, the Special Shareholders’ Meeting of BBVA Seguros, S.A. de Seguros y Reaseguros resolved to increase its capital stock by €30 million, with additional paid-in capital of €19 million, through the issuance of approximately 5 million shares for €9.82 per share (€6.01 par value each and the remainder as additional paid-in capital). The Group subscribed a total of 4.9 million shares for a total amount of €49,085 thousand.
In 2003 BBVA Desarrollos Inmobiliarios increased capital by €63 million.
In 1990, 1994 and 1995, tax assessments for 1986 to 1990 were issued to the nonconsolidable subsidiaries BBVA Seguros, S.A. (formerly Euroseguros, S.A.) and Senorte Vida y Pensiones, S.A. totaling €88,066 thousand of principal and €39,072 thousand of late-payment interest, plus €66,057 thousand of penalties, after adjustment pursuant to the revised General Tax Law. The companies filed pleadings and appeals against the assessments and several administrative decisions and court rulings were handed down in 1997 through 2000. As a result of application of the criteria set forth in these court rulings, some of which have been appealed against by the Group and by the Spanish tax authorities, the tax debts would be reduced to €50,677 thousand of principal and €19,851 thousand of interest. In order to file these appeals, the Bank provided guarantees totaling €97,876 thousand to the tax authorities. In 2003 further court rulings were handed down, which have been appealed against. However, the Bank’s directors
F - 46
and legal advisers consider that the possible effects of these rulings would not materially affect the accompanying consolidated financial statements and, additionally, in accordance with the accounting principle of prudence, adequate provisions have been recorded therefore.
The detail, by company, of the balances of the “Consolidation Goodwill” caption in the accompanying consolidated balance sheets as of December 31, 2004, 2003 and 2002, and of the variations there in 2004 and 2003, is as follows:
Retirements
(Notes 4and 11)
(Note 3-g)
Fully or proportionally consolidated companies (Note 4)-
AFORE Bancomer
Próvida Group
BBVA Puerto Rico, S.A.
Finanzia, Banco de Crédito, S.A.
BBVA (Portugal), S.A.
AFP Porvenir, S.A. (Dominican Republic)
BBVA Crecer AFP ( Dominican Republic)
Other companies
Companies accounted for by the equity method (Note 11)-
Telefónica, S.A.
Repsol YPF, S.A.
Gas Natural, S.D.G.
Seguros Bancomer, S.A. de C.V.
Banca Nazionale del Lavoro, S.p.A.
Iberia, S.A.
Iberdrola, S.A.
Acerinox, S.A.
Pensiones Bancomer, S.A. de C.V.
In 2004, Banca Nazionale del Lavoro, S.p.A. performed a net worth rebalancing process, which was authorized by the Italian authorities, and was instrumented, basically, in the form of a restatement of its balance sheet in local books and a necessary capital increase performed, among other reasons, to cover the impact the company expects as a result of the first-time application in 2005 of International Financial Reporting Standards. Additionally, this company has announced a downward revision of its earnings for 2004
As a result of the above, in 2004 the Group relieved form the accounts goodwill of Banca Nazionale del Lavoro, S.p.A. of €57,057 thousand, and amortized early the remaining goodwill amounting to €145,040 thousand, once the ordinary period amortization charge had been taken. Similarly, the Bank subscribed to the aforementioned capital increase, thus maintaining its ownership interest in the aforementioned company.
As indicated in Note 3-g, the Group extended the goodwill amortization period relating to the finance companies located in Mexico from 10 to 20 years. The effect of this extension of the amortization period was to reduce the charge to the accompanying 2004 consolidated statement of income by €243 million.
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Provida Group
Crédit Lyonnais, S.A.
Wafabank, S.A.
Bradesco, S.A.
€48,589 thousand of the amortization recorded in the 2003 consolidated statement of income (of which €34,719 thousand had been provisioned as of December 2002) relate to the early amortization of the consolidation goodwill of Banco Bradesco, S.A. (Note 4).
Also, €70,045 thousand of consolidation goodwill relating to Gas Natural, S.D.G. were amortized early (Note 11).
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BBVA Horizonte Pensiones y Cesantías,
S.A. – Colombia
AFP Horizonte, S.A. – Peru
Midas Group (Portugal)
Autopistas Concesionaria Española, S.A.
Per the information available, the estimated future revenues attributable to the Group from each of the investments generating goodwill in the remaining amortization period of this goodwill exceed the related unamortized balances as of December 31, 2004, 2003 and 2002.
The variations in 2004, 2003 and 2002 in the balances of the “Negative Consolidation Difference” caption in the accompanying consolidated balance sheets were as follows:
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Property and equipment-
The variations in 2004 and 2003 in property and equipment accounts in the accompanying consolidated balance sheets were as follows:
Revalued cost-
Balances at 2002 year-and
Transfers
Exchange difference and other
Balances at 2003 year-end
Balances at 2004 year-end
Accumulated depreciation-
Balances at 2002 year-end
Provisions for property and equipment (Note 2-f)-
Transfers from loan loss provisions (Note 8)
Property and equipment, net-
Balance at December 31, 2002
The net property and equipment provisions of €12,453 thousand, €86,340 thousand and €122,508 thousand charged to 2004, 2003 and 2002 income, respectively, to supplement the loan loss provisions transferred when loans were foreclosed (Note 8), are recorded under the “Extraordinary Losses - Net Special Provisions” caption in the accompanying consolidated statements of income (Notes 3-h and 28-g).
The gains and losses on property and equipment disposals amounted to €96,535 thousand and €20,571 thousand, respectively, in 2004 (€95,884 thousand and €51,636 thousand, respectively, in 2003 and €195,493 thousand and €99,712 thousand, respectively, in 2002), and are included under the “Extraordinary Income” and “Extraordinary Losses” captions in the accompanying consolidated statements of income (Note 28-g).
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The net book value as of December 31, 2004, 2003 and 2002, of the property and equipment of foreign subsidiaries was €1,683,633 thousand, €1,659,530 thousand and €2,383,965 thousand, respectively. Also, the amount of leased assets on which the purchase option is expected to be exercised was not material as of December 31, 2004, 2003 and 2002.
Intangible assets-
The detail of the balance of intangible asset accounts as of December 31, 2004, 2003 and 2002, is as follows:
Incorporation and preopening expenses
Computer software acquisition expenses
Other intangible assets
The variations in 2004, 2003 and 2002 in intangible asset accounts were as follows:
Balance at December 31, 2001
- Additions
- Period amortization
- Exchange differences and other
€180,565 thousand of computer software acquisition costs were amortized in 2004 (€66,583 thousand and €129,475 thousand in 2003 and 2002, respectively) with a charge to the “General Administrative Expenses - Other Administrative Expenses” caption in the consolidated statements of income.
€92,224 thousand, €120,732 thousand and €123,689 thousand of other expenses were amortized in 2004, 2003 and 2002, respectively, and were recorded under the “Depreciation and Amortization” caption in the accompanying consolidated statements of income.
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The detail of the balances of these captions in the accompanying consolidated balance sheets is as follows:
Other assets-
Taxes receivable (Notes 3-l and 25):
Prepaid income tax
Tax assets
Interim dividends (Notes 2-d and 5)
Checks drawn on credit institutions
Clearing house
Transactions in transit
Options acquired (Note 3-m)
Exchange differences on forward transactions (Note 3-b)
Items to be adjusted for hedging futures transactions (Note 3-m)
Financial transactions pending settlement
Differences in pension provision less deferred contributions of Group companies in Spain (Note 3-j)
Differences in pension provision of Group companies abroad (Note 3-j)
Other liabilities-
Tax collection accounts
Special accounts
Payment obligations (Note 5)
Options written (Note 3-m)
Deferred income tax (Notes 3-l and 25)
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The detail of the balances of these asset and liability captions in the accompanying consolidated balance sheets is as follows:
Assets:
Prepaid interest on funds taken at a discount (Note 3-n)
Accrued interest earned on investments not taken at a Discount
Prepaid expenses
Deferred interest expenses
Other accruals
Liabilities:
Unearned interest revenues on transactions taken at a discount (Note 3-n)
Accrued costs incurred on funds not taken at a discount
Accrued expenses
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The breakdown, by currency, type and customer residence sector, of the balances of this caption on the liability side of the accompanying consolidated balance sheets is as follows:
Bank of Spain and other central banks:
Credit account drawdowns
Assets sold under repurchase agreement (Notes 6, 7 and 8)
Due to credit institutions:
Time deposits
Assets sold under repurchase agreement (Notes 6 and 7)
Security payables
By sector
As of December 31, 2004, 2003 and 2002, the Group had assets, mainly loans, credits and securities (Note 8) securing financing lines assigned by the Bank of Spain and other central banks. As of December, 2004, 2003 and 2002, the financing limit assigned to the Group was €13,932,391 thousand, €16,622,829 thousand and €11,653,181 thousand, respectively, of which it had drawn down €11,249,454 thousand, €13,981,458 thousand and €7,998,063 thousand, respectively.
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The detail, by due date, of the balances of the “Due to Credit Institutions - Other” caption in the accompanying consolidated balance sheets, and of the average interest rates for each year, is as follows:
3 Months to 1
Year
1 to
5 Years
Over
Bank of Spain and other central banks
Assets sold under repurchase agreement
Security payables and other accounts
The detail, by type and customer country of residence, of this caption as of December 31, 2004, 2003 and 2002, is as follows:
Assets Sold with
Repurchase
Commitment
2004:
Non-resident sector:
Latin-America
2003:
2002:
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The breakdown, by currency and sector, of the balances of this caption in the accompanying consolidated balance sheets is as follows:
Other resident sectors-
Time deposits (Note 3-j)
Assets sold under repurchase agreement (Notes 6, 7, 8 and 9)
The detail, by due date, of the balances of the “Savings Accounts - Time” and “Other Deposits - Time” captions in the accompanying consolidated balance sheets is as follows:
Savings accounts - Time-
Other deposits – Time-
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Other European Countries
The breakdown, by type of security and currency, of the balances of the “Marketable Debt Securities - Bonds and Debentures Outstanding” account in the accompanying consolidated balance sheets as of December 31, 2004, 2003 and 2002, is as follows:
In euros-
Nonconvertible floating rate bonds and debentures
Nonconvertible bonds and debentures at weighted fixed rate of 4.57% (*)
Convertible debentures
Mortgage bonds
In foreign currencies-
Nonconvertible bonds and debentures at weighted fixed rate of 3.85% (**)
Floating rate mortgage bonds
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The “Mortgage Bonds” account includes various issues with an average weighted interest rate of 4.14%, 4.65% and 4.82% in 2004, 2003 and 2002, respectively, and the final maturity of the last of them is in 2022. The nominal amount outstanding and the interest on the mortgage bonds are guaranteed, without a registration requirement, by such mortgages as may, at any time, be registered in favor of the Bank (the issuer), without prejudice to its financial liability.
In 2003 and 2002, BBVA Global Finance Ltd. launched various issues amounting to €4,678,266 thousand and €5,080,695 thousand, respectively, within a medium-term foreign currency euro-bond program with a limit of €20,000 million (Note 21). These issues are denominated in euros, U.S. dollars, Japanese yens and various other currencies, have a fixed or variable yield based, in the latter case, on a floating annual return plus a variable issue or redemption premium dependent on certain factors.
The debt securities composing the balance of this caption as of December 31, 2004, are scheduled to mature (disregarding the possibility of the early redemption of certain issues) as follows:
Maturity
2006
2007
2008
2009
Subsequent years
Following is a breakdown, by due date and currency, of the balance of “Promissory Notes and Other Securities” in the accompanying consolidated balance sheets:
By due date:
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The variations in 2004, 2003 and 2002 in the “Provisions for Contingencies and Expenses - Pension Provision” and “Provisions for Contingencies and Expenses - - Other Provisions” captions in the accompanying consolidated balance sheets were as follows:
Beginning balances
Provisions charged to income for the year
Provision charged to reserves (Notes 3-j and 24)
Inclusion of companies in the Group
Transfers of off-balance-sheet risks (Note 8)
Transfers and other variations
Releases
Payments to personnel taking early retirement (Note 3-j)
Amounts used and other variations
Transfers to off-balance-sheet risks (Note 8)
Exclusion of companies from the Group
Ending balances (Note 2-f)
The provisions out of 2004 income to the “Pension Provision” were charged to the “Financial Expenses”, “General Administrative Expenses” and “Extraordinary Losses” captions in the accompanying consolidated statement of income (€85,381 thousand, €45,555 thousand and €602,919 thousand, respectively). The amounts charged to these captions in 2003 were €69,893 thousand, €56,420 thousand and €20,866 thousand, respectively. The amounts charged to these captions in 2002 were €60,041 thousand, €39,067 thousand and €101,626 thousand, respectively (Note 28).
The provisions out of 2004 income to “Other Provisions” were mainly charged to the “Market Operations” and “Extraordinary Losses” captions in the accompanying consolidated statement of income (€67,169 thousand and €434,398 thousand, respectively). The amounts charged to these captions in 2003 were €783 thousand and €575,090 thousand, respectively The amounts charged to these captions in 2002 were €141,218 thousand and €785,267 thousand, respectively. (Note 28). The reversals are recorded mainly in “Extraordinary Income” in the related accompanying consolidated statements of income.
The breakdown of the balances of the “Other Provisions” and “Provision for taxes” captions in the accompanying consolidated balance sheets as of December 31, 2004, 2003 and 2002, is as follows:
Provisions for other commitments to employees (Notes 3-j and 3-k):
Covered by shares (Note 3-i)
Provisions for taxes
Provisions for contingencies
Provisions for off-balance-sheet risks (Notes 3-c and 8)
Provision for futures transactions (Notes 3-m and 26)
Other provisions (*)
The provisions for taxes were recorded in “Other provisions” (€34,662 thousand and €34,842 thousand) captions in 2004, 2003 and 2002 respectively.
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The variations in 2004, in the “Other Provisions” caption in the accompanying consolidated balance sheets were as follows:
Provisions for other
commitments to
employees
Provisions
for off-balancesheet risks
Provisions for
futurestransactions
Tax
Beginning Balances 2004
Inclusion of companies in the group
Transfers to off-balance-sheet risks
Transfers and exchanges differencies
Ending balances 2004
The variations in 2003, in the “Other Provisions” caption in the accompanying consolidated balance sheets were as follows:
othercommitmentsto employees
off-balance
sheet risks
for futures
transactions
Beginning Balances 2003
Ending balances 2003
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The detail of the balances of the “Subordinated Debt” caption in the accompanying consolidated balance sheets as of December 31, 2004, 2003 and 2002, is as follows:
ISSUER
Interest Rate
at 12/31/04
Final Maturity
Date
Issues in euros-
BANCO BILBAO VIZCAYA ARGENTARIA, S.A.:
July 1996
February 1997
September 1997
December 2001
July 2003
November 2003
October 2004
BBVA CAPITAL FUNDING, LTD.:
September 1995
March 1997
October 1997
July 1999
February 2000
December 2000
July 2001
October 2001
November 2001
Issues in foreign currencies-
BBVA GLOBAL FINANCE, LTD.:
July 1995
December 1995
BBVA CHILE, S.A.
BBVA BANCO FRANCES, S.A.
August 1995
October 1995
February 1996
November 1996
BBVA PUERTO RICO
BBVA BANCOMER
BBVA BANCOMERCAPITAL TRUST:
February 2001 (Note 4)
These issues are classified as subordinated debt and, accordingly, are deemed to have a lower seniority than all the accounts payable to common creditors.
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The detail, by due date, of the balance of the “Subordinated Debt” caption in the consolidated balance sheet as of December 31, 2004, is as follows:
The issues of BBVA Capital Funding, Ltd. and BBVA Global Finance, Ltd. are guaranteed (secondary liability) by the Bank, and the issue of Bancomer Trust is guaranteed (secondary liability) by BBVA Bancomer.
The issue by Bilbao Vizcaya Investment BV, of US$ 250 million, was redeemed early in January 2002 through conversion of the bonds into shares of the Bank. This exchange was performed at the fixed conversion rate of €3.99 euros per share, which gave rise to the delivery of 377,330 previously-issued shares. These transactions did not give rise to material gains.
The interest on the subordinated debt in 2004, 2003 and 2002 amounted to €343,778 thousand, €327,554 thousand and €405,775 thousand, respectively (Note 28-b).
The variations in 2004, 2003 and 2002 in the balances of this caption in the accompanying consolidated balance sheets were as follows:
Prior year’s net income
Capital increases and reductions
Dividends paid to minority shareholders
Changes in the composition of the Group and changes In the percentages of ownership (Note 4)
Exchange differences (Note 3-b)
Other variations (*)
Share in income for the year
The breakdown, by company, of the “Minority Interests” caption in the accompanying consolidated balance sheets as of December 31, 2004, 2003 and 2002, is as follows:
Preferred shares-
BBVA International, Ltd. (1)
BBVA Preferred Capital, Ltd. (2)
BBVA Privanza International (Gibraltar), Ltd. (2)
BBVA Capital Funding, Ltd. (3)
BBVA Capital Finance, S.A.
By company-
Banc Internacional d’Andorra, S.A.
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The breakdown, by company, of the share in income for the years ended December 31, 2004, 2003 and 2002, is as follows:
BBVA International, Ltd.
BBVA Preferred Capital, Ltd.
BBVA Privanza International (Gibraltar), Ltd.
BBVA Capital Funding, Ltd.
BBVA Bancomer group
BBVA Banco Francés group
BBVA Colombia group
BBVA Chile group
BBVA Banco Continental group
BBVA Banco Provincial group
Provida group
The foregoing balances include various issues of noncumulative, nonvoting, preferred stock guaranteed by Banco Bilbao Vizcaya Argentaria, S.A., the detail of which is as follows:
BBVA Privanza International (Gibraltar), Ltd.-
June 1993
June 1997
BBVA International, Ltd.-
March 1998
November 1998
February 1999
April 2001
March 2002
December 2002
BBVA Capital Funding, Ltd.-
April 1998
BBVA Preferred Capital, Ltd.-
June 2001
December 2003
July 2004
December 2004
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These issues were subscribed by third parties outside the Group and are wholly or partially redeemable at the Company’s option after five or ten years from the issue date, depending on the terms of each issue.
As of December 31, 2003 and 2002 the capital stock of Banco Bilbao Vizcaya Argentaria, S.A. amounted to €1,565,967,501.07, and consisted of 3,195,852,043 fully subscribed and paid registered shares of €0.49 par value each.
There were no variations in the Bank’s capital stock in 2003 and 2002.
In February, as a result of the tender offer launched on 40.6% of the capital stock of BBVA Bancomer, S.A., capital was increased through the issuance of 195,000,000 shares, with a price per share of €10.25 (consisting of a par value of €0.49 and additional paid-in capital of €9.76).
As of December 31, 2004, the capital stock of Banco Bilbao Vizcaya Argentaria, S.A. amounted to €1,661,517,501,07, and consisted of 3,390,852,043 fully subscribed and paid registered shares of €0.49 par value each.
The shares of Banco Bilbao Vizcaya Argentaria, S.A. are listed on the computerized trading system of the Spanish stock exchanges and on the New York, Frankfurt, London, Zurich and Milan stock markets. Also, as of December 31, 2004, the shares of BBVA Banco Continental, S.A., Banco Provincial C.A., BBVA Colombia, S.A., BBVA Chile, S.A., BBVA Banco Francés, S.A. and AFP Provida were listed on their respective local stock markets and, in the case of the last three entities, on the New York Stock Exchange. In addition, BBVA Banco Francés, S.A. are listed on the Latin-American market of the Madrid Stock Exchange.
The variations in 2004, 2003 and 2002 in the “Treasury Stock” caption on the asset side of the accompanying consolidated balance sheets were as follows:
Purchases (Note 4)
Net release of the securities revaluation reserve (Note 3-i)
Net charge to the securities revaluation reserve (Note 3-i)
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Securities revaluation reserves to cover treasury stock were recorded amounting to €17,367 thousand, €15,864 thousand and €749 thousand, as of December 31, 2004, 2003 and 2002, respectively. The net provisions to releases of securities revaluation reserves in 2004, 2003 and 2002 due to disposals of treasury stock amounted to €2,590 thousand, €2,643 thousand and €1,053 thousand, respectively, and were recorded in 2004 under the “Income on Group Transactions” / “Losses on Group Transactions”, in 2003 under the “Income on Group Transactions” captions and in 2002 under the “Losses on Group Transactions” caption, in the accompanying consolidated statements of income.
As of December 31, 2004. 2003 and 2002, the Bank held treasury stock with a nominal value of €320 thousand, €2,509 thousand and €5,242 thousand, respectively, to cover futures transactions related to the performance of certain stock market indexes. (Note 26).
From January 2002 through December 31, 2002, the percentage of outstanding shares held by BBVA and its consolidated companies varied from 0.13% to 0.74% calculated on a monthly basis. From January 2003 through December 31, 2003, the percentage of outstanding shares held by BBVA and its consolidated companies varied from 0.153% to 0.683% calculated on a monthly basis. From January 2004 through December 31, 2004, the percentage of outstanding shares held by BBVA and its consolidated companies varied from 0.08% to 0.58% calculated on a monthly basis.
The gains and losses on treasury stock transactions are recorded under the “Income on Group Transactions” and “Losses on Group Transactions” captions, respectively, in the accompanying consolidated statements of income, amounting to €21,674 thousand and €13,045 thousand, respectively in 2004, €16,048 thousand and €18,758 thousand, respectively, in 2003 and €15,802 thousand and €23,898 thousand, respectively, in 2002.
As of December 31, 2002, there were no individual equity investments of over 5% in the Bank’s capital stock. However, as of December 31, 2003, Chase Nominees Ltd., in its capacity as an international custodian bank, owned 5.25% of the Bank’s capital stock. As of December 31, 2004, there were no individual equity investments of over 5% in the Bank’s capital stock. As of December 31, 2004, 2003 and 2002, Fundación Banco Bilbao Vizcaya Argentaria, a private not-for-profit charitable, educational and cultural institution set up in 1988 with a contribution of €84,142 thousand from the Bank which was charged to the merger surpluses, owned, as of December 31, 2004, 2003 and 2002, a total of 34,365,852 shares of the Bank.
On February 28, 2004, the Shareholders’ Meeting resolved to delegate to the Board of Directors, in accordance with the stipulations of Article 153.1.b of the Spanish Corporations Law, the power to increase capital, on one or several occasions, by a maximum par value equal to 50% of the Company’s subscribed and paid capital stock at the date of the resolution, i.e. €830,758,750.54. The legally stipulated period within which the directors can carry out this increase is five years. As of December 31, 2004, the Board of Directors had not made use of this power.
As of December 31, 2004, the resolutions adopted by the Shareholders’ Meetings on March 1, 2003 and March 9, 2002, were still in force. These resolutions authorized the issuance of up to €6,000 million of debentures convertible to and/or exchangeable for Bank shares and empowered the Board of Directors to issue, on one or several occasions, warrants on shares of the Company up to a maximum of €1,500 million, fully or partially convertible to or exchangeable for Company shares. As of December 31, 2004, no issues had been made under this authorization.
In addition to the aforementioned resolutions, in February 2004 the Shareholders’ Meeting authorized the Board of Directors, for a period of five years, to issue fixed-income securities of any class or type, up to a maximum of €71,750 million.
As of December 31, 2004, 2003 and 2002, there were no capital increases in progress at any of the companies in the Finance Group.
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The variations in 2004, 2003 and 2002 in the “Reserves” captions in the accompanying consolidated balance sheets were as follows:
Additional
Paid-in Capital
Balances at December 31, 2001
Dividends out of prior year’s net income
Recording of provisions for early retirement, net of taxes(Notes 2-h, 3-j and 20)
Exchange differences arising from consolidation(Notes 3-b and 4)
Balances at December 31, 2002
Capital Increase (Note 23)
Additional paid-in capital-
This caption in the accompanying consolidated balance sheets includes the surpluses arising from the merger of Banco Bilbao, S.A. and Banco Vizcaya, S.A. (Note 1), the detail of which is as follows:
Revaluation of:
- Buildings
- Equity securities portfolio
Appropriations in 1988
The revised Corporations Law expressly permits the use of the additional paid-in capital balance to increase capital and establishes no specific restrictions as to its use.
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Retained earnings and revaluation reserves-
The detail of these captions in the accompanying consolidated balance sheets, which include the reserves of the Group attributed to the Bank, is as follows:
Restricted reserves-
Legal reserve
Restricted reserve for retired capital stock
Restricted reserve for Parent Company shares
Restricted reserve for redenomination of capital stock in Euros
Revaluation reserves Royal Decree-Law 7/1996
Unrestricted reserves-
Voluntary and other reserves
Consolidation reserves attributed to the Bank
Legal reserve-
According to the revised Corporations Law, 10% of the income for each year must be transferred to the legal reserve. These amounts must be transferred until the balance of this reserve reaches 20% of capital stock. This limit had already been reached by Banco Bilbao Vizcaya Argentaria, S.A. as of December 31, 2004, 2003 and 2002 (Note 5), considering the proposal of distribution of income. The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased capital stock amount.
Except as mentioned above, until the legal reserve exceeds 20% of capital stock, it can only be used to offset losses, provided that sufficient other reserves are not available for this purpose.
According to the revised Corporations Law and to Law 46/1998 on the introduction of the euro, the respective restricted reserves were recorded in relation to treasury stock held by the Group, to customer loans secured by shares of the Bank, to the reduction of the par value of each share in April 2000 and to the redenomination of capital stock in euros.
Asset revaluation reserves (Notes 3-e and 3-f)-
Prior to the merger, Banco de Bilbao, S.A. and Banco de Vizcaya, S.A. availed themselves of the asset revaluation provisions of the applicable enabling legislation. In addition, on December 31, 1996, the Bank revalued its property and equipment pursuant to Royal Decree-Law 7/1996 by applying the maximum coefficients authorized, up to the limit of the market value arising from the existing valuations. The resulting increases in the cost and accumulated depreciation of property and equipment and, where appropriate, in the cost of equity securities, were allocated as follows:
Legal revaluations of property and equipment:
Cost
Single revaluation tax (3%)
Balance at December 31, 1999
Adjustment as a result of review by the tax authorities in 2000
Balance at December 31 2002, 2003 and 2004
Subsequent to the review of the balance of the “Revaluation Reserves Royal Decree-Law 7/1996” account by the tax authorities in 2000, it can only be used, free of tax, to offset recorded losses and to increase capital stock through
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January 1, 2007. From that date, the remaining balance of this account can be taken to unrestricted reserves, provided that the surplus has been depreciated or the revalued assets have been transferred or written off. If this balance were used in a manner other than that provided for in Royal Decree-Law 7/1996, it would be subject to tax.
Reserves and accumulated losses at consolidated companies-
The breakdown, by company or company group, of these captions in the accompanying consolidated balance sheets is as follows:
RESERVES AND ACCUMULATED LOSSES AT CONSOLIDATED COMPANIES-
Fully or proportionally consolidated companies:
Grupo Bancomer
Grupo BBVA Continental
Grupo Próvida
Grupo BBVA Colombia
Grupo BBVA Banco Francés
Grupo BBVA Chile
Grupo BBVA Banco Provincial
Banco Bilbao Vizcaya Argentaria Uruguay, S.A.
BBVA International Invesment Corporationt
Ancla Investments, S.A.
Banc International d’ Andorra, S.A.
Banco Bilbao Vizcaya Argentaria Puerto Rico
BBVA Suiza, s.a. (BBVA Switzerland)
Fnanzia Banco de Crédito
Banco Industrial de Bilbao, S.A.
BBVA Privanza Bank (Jersey), ltd.
Canal International Holding, s.a.
Cartera e Inversiones, S.A
Corporacion General Financiera, S.A.
Corporacion Industrial y Servicios, s.l.
Cidessa uno, S.L.
BBVA Ireland PLC
Bilbao Vizcaya America B.V.
BBVACartera de Inversiones, SICAV, S.A.
Anida Grupo Inmobiliario, S.L.
BBVA Pensiones, S.A.
Compañía Chilena de Inversiones, S.L.
BBVAPR Holding Corporation
BBVA Bolsa S.V., S.A.
Sociedad de Estudios y Analisis Financieros, S.A.
BBV America, S.L.
Other Companies
Companies accounted for by the equity method:
Senorte Vida y Pensiones, S.A.
Banco Atlántico, S.A.
Banca Nazionale del Lavoro, SpA
Exchange gains:
Grupo BBVA Bancomer
Grupo Provida
BBVA Puerto Rico S.A.
Bilbao Vizcaya América, B.V.
BBVA International Investment Corporation
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For the purpose of allocating the reserves and accumulated losses at the consolidated companies in the preceding table, the transfers of reserves arising from the dividends paid and the writedowns or transactions between these companies are taken into account in the year in which they took place.
The individual financial statements of the subsidiaries which give rise to the balances recorded under the “Reserves and Accumulated Losses at Consolidated Companies - Fully and Proportionally Consolidated Companies” captions in the foregoing table as of December 31, 2004, 2003 and 2002, include €3,667,253 thousand, €3,617,649 thousand and €4,059,581 thousand, respectively, of restricted reserves, of which €48,058 thousand, €102,658 thousand and €121,893 thousand, respectively, are restricted reserves for Parent Company shares.
The balance of the “Other Liabilities - Tax Collection Accounts” caption in the accompanying consolidated balance sheets includes the liability for applicable taxes, including the provision for corporate income tax in each year, net of tax withholdings and prepayments in each year, in the case of companies with a net tax liability. The amount of the tax refunds due to Group companies is included under the “Other Assets - Taxes Receivable” caption in the accompanying consolidated balance sheets.
Banco Bilbao Vizcaya Argentaria, S.A. and its tax-consolidable subsidiaries file consolidated tax returns. The subsidiaries of Argentaria, which had been in Tax Group 7/90, were included in Tax Group 2/82 from 2000, since the merger had been carried out under the tax neutrality system provided for in Title VIII, Chapter VIII of Corporate Income Tax Law 43/1995. On December 30, 2002, the Group made the pertinent notification to the Ministry of Economy and Finance to extend its taxation under the consolidated taxation regime indefinitely, in accordance with current legislation. The other Group companies file individual tax returns in accordance with the applicable tax regulations.
As in prior years, in 2004 certain Group entities performed or participated in corporate restructuring transactions under the special tax neutrality system regulated by Law 29/1991, on December 16, adapting certain tax items to EU directives and regulations and by Title VIII, Chapter VIII of Corporate Income Tax Law 43/1995, on December 27. The disclosures required under the aforementioned legislation are included in the notes to financial statements of the relevant Group entities for the year in which the transactions took place.
The reconciliation of corporate income tax payable, calculated on the basis of the income per books before taxes, to the provision recorded is as follows:
Corporate income tax at the standard rate of 35%
Decrease arising from permanent differences:
Tax credits and tax relief at consolidated companies
Effect of allocation of the Group’s share in the net income of associated companies
Other items, net
Net increase (decrease) arising from timing differences
Corporate income tax and other taxes payable
Recording (use) of prepaid or deferred taxes
Provision for corporate income tax and other taxes accrued in the year
Adjustments to the provision for prior years’ corporate income tax and other taxes
As required by Bank of Spain Circular 4/1991 and concordant regulations, the deferred tax assets that will foreseeably be recovered during the next ten years are included under the “Other Assets” caption in the accompanying consolidated balance sheets (Note 15). The main items for which the Group companies have recorded deferred tax assets are provisions to cover pensions and similar obligations to employees (€1,152,594 thousand, €989,642
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thousand and €828,432 thousand in 2004, 2003 and 2002, respectively at the Spanish companies) and the loan loss provisions (€754,777 thousand, €779,892 thousand and €962,668 thousand in 2004, 2003 and 2002, respectively at BBVA Bancomer, S.A. de C.V. and €474,538 thousand, €316,637 thousand and €207,089 thousand in 2004, 2003 and 2002, respectively at BBVA, S.A.).
The Bank and certain Group companies have opted to defer corporate income tax on the gains on disposals of property and equipment and shares in investee companies more than 5% owned by them, the breakdown of which by year is as follows:
1996
1997
1998
1999
Pursuant to the regulations in force until December 31, 2001, the amount of the aforementioned gains must be included in equal parts in the taxable income of the seven tax years ending from 2000, 2001, 2002, 2003, 2004 and 2005, respectively. Following inclusion of the portion relating to 2001, the amount of the income not yet included was €2,976,931 thousand, with respect to which the Group companies availed themselves of the provisions of the Third Transitory Provision of Law 24/2001, on December 27, on Administrative, Tax and Social Security Measures, and practically all of this amount (€2,971,625 thousand) constitutes an addition to the 2001 taxable income for timing differences.
The share acquisitions giving rise to an ownership interest of more than 5%, particularly investments of this kind in Latin America, have been assigned to meet reinvestment commitments assumed in order to apply the above-mentioned tax deferral.
In 2004 the Bank and certain Group companies availed themselves of the corporate income tax credit for reinvestment of extraordinary income obtained on the transfer for consideration of property and of shares in investees more than 5% owned. The income subject to this tax credit amounted to €78,145 thousand. The acquisition in 2004 of shares of Latin American companies, mainly, was included under the group of reinvestment commitments under the aforementioned tax credit.
As of December 31, 2004, 2003 and 2002, certain consolidated companies had tax losses qualifying for carryforward against the taxable income, if any, of the ten years following the year in which they were incurred. As of December 31, 2004, 2003 and 2002, the tax assets recorded for tax loss carryforwards amounted to €399,621 thousand, €759,051 thousand and €1,018,229 thousand, respectively, of which €236,488 thousand, €539,670 thousand and €695,573 thousand, respectively relate to BBVA Bancomer, S.A. de C.V. and €122,467 thousand, €151,110 thousand and €236,226 thousand, respectively, to BBVA Bancomer Servicios, S.A. de C.V. Based on the available financial projections, the income expected to be generated by these two companies will enable these amounts, and the deferred tax assets recorded by them, to be recovered over a period of less than ten years.
As a result of the tax audits by the tax inspection authorities, in 2002 tax assessments were issued to certain Group companies for the years through 1997, some of which were contested. Taking into account the timing nature of certain tax assessment items, and in accordance with the principle of prudence, full provisions had been included in the accompanying consolidated financial statements for the amounts that arose in this connection. The other Group companies generally have 1998 and subsequent years open for review by the tax inspection authorities for the main taxes applicable to them.
The varying interpretations which can be made of the tax regulations applicable to the operations of banks give rise to certain contingent tax liabilities for the open years that cannot be objectively quantified. However, the Bank’s Board of Directors and its tax advisers consider that the possibility of these contingent liabilities materializing in future reviews by the tax authorities is remote and that, in any event, the tax charge which might arise therefrom would not materially affect that consolidated financial statements.
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The detail of the balances of the “Memorandum Accounts” caption in the accompanying consolidated balance sheets as of December 31, 2004, 2003 and 2002, which include the main commitments and contingent liabilities that arose in the normal course of banking business, is as follows:
Contingent liabilities-
Deposits, guarantees and sureties
Commitments-
Credit institutions
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In addition to the above-mentioned contingent liabilities and commitments, at the end of 2004, 2003 and 2002 the Group had other transactions which, pursuant to current legislation, are not reflected in the accompanying consolidated balance sheets. The detail of the notional or contractual value of these transactions as of December 31, 2004, 2003 and 2002, and of the type of market on which they were arranged, is as follows:
Thousands of Euros
Type of Market
- Foreign currency purchases against euros
- Foreign currency purchases against foreign currencies
- Foreign currency sales against euros
Financial asset purchase and sale Transactions
- Purchases
- Sales
- Bought
- Sold
The notional or contractual amounts of these transactions do not necessarily reflect the volume of actual risk assumed by the Group, since the net position in these financial instruments is the result of the offset and/or combination of them, This net position, even if it is not deemed a hedge for accounting purposes, is used by the Group basically to eliminate or significantly reduce interest rate, market or exchange risk. The resulting gains or losses on these
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transactions are included under the “Market Operations” caption in the consolidated statements of income. Any gains or losses on hedging transactions are included as an increase in, or offset of, the results on the positions covered by them.
For the purposes of calculating the minimum capital requirements established by Bank of Spain Circular 5/1993, credit and counterparty risk arising from OTC interest rate, precious metals and currency derivative transactions, as of December 31, 2003 is measured by the market value method (according with the 3/2003 Circular of Spain Bank, changing the prius original risk method). As of December 31, 2004, 2003 and 2002, the risk-weighted assets amounted to €4,496,713 thousand, €3,870,801 thousand and €4,387,162 thousand, respectively, which entails a minimum capital requirement of €329,737 thousand, €309,664 thousand and €350,973 thousand, respectively, for transactions of this kind.
The detail, by maturity, of these transactions as of December 31, 2004, 2003 and 2002, is as follows:
1 Year
5 to
10 Years
Interest rate and securities transactions-
Swaps
Forward rate agreements
Financial futures
Unmatured financial asset purchase and sale transactions
Securities and interest rate options
Exchange rate transactions-
Forward foreign currency purchase and sale transactions and swaps
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As of December 31, 2004, 2003 and 2002, the Group had arranged share price risk and interest rate risk macrohedges consisting of securities listed on the main international markets and long-term deposit transactions, respectively (Note 3-m).
The detail of the notional value of hedging and trading futures transactions as of December 31, 2004, 2003 and 2002, is as follows:
Interest rate and securities transactions
Options and futures
Exchange rate transactions
Forward foreign currency purchase and sale transactions, currency futures and swaps
Foreign currency options
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Following is a breakdown, by balance-sheet account hedged, of the notional balances of interest rate, securities and exchange rate hedging derivatives as of December 31, 2004, 2003 and 2002:
AMOUNT
B/S ACCOUNT HEDGED
Due from credit institutions
Other assets and liabilities
The market value of the trading futures transactions corresponding to the notional amounts of the underlying assets in the table above as of December 31, 2004, 2003 and 2002, is as follows:
As of December 31, 2004, 2003 and 2002, the provisions covering unrealized losses on trading interest rate and securities futures transactions (Notes 3-m and 20) amounted to approximately €310,944 thousand, €277,614 thousand and €280,721 thousand, respectively.
Off-balance-sheet managed funds
The detail of the off-balance-sheet funds managed by the Group as of December 31, 2004, 2003 and 2002, is as follows:
Assets managed
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Following is a detail of the major balances in the accompanying consolidated balance sheets of the Group as of December 31, 2004, 2003 and 2002, with proportionally consolidated companies and companies accounted for by the equity method (Note 2-c) at market prices:
Due to credit institutions
Memorandum accounts:
Contingent liabilities
Commitments and contingent liabilities
Statement of income:
There are no other material effects on the financial statements of the Group arising from transactions with these companies, other than the effects arising from valuing the investments in them by the equity method (Notes 2-c and 28-f) and from the insurance policies to cover pension and similar commitments (Note 3-j).
As of December 31, 2004, the notional amount of the futures transactions arranged by the Group with the main related companies amounts to approximately €11,321,732 thousand (€7,021,414 thousand and €5,388,845 thousand in 2003 and 2002, respectively).
In addition, as part of its normal activity, the Group has entered into agreements and commitments of various types with shareholders of subsidiaries and associated companies, which have no material impacts on the financial statements.
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Following is certain relevant information in connection with the accompanying consolidated statements of income:
The table below shows the geographical breakdown of the main revenue balances in the accompanying consolidated statements of income, by country of location of the Bank branches and Group companies giving rise to them:
Financial revenues-
Other European countries
Rest of the world
Income from equities portfolio-
Fees collected-
Market operations-
Other operating income-
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The detail, by type of transaction, of certain captions in the accompanying consolidated statements of income is as follows:
Fixed-income portfolio
Loans to public authorities
Loans to customers
Other revenues
Financial expenses-
Due to Bank of Spain and other central banks
Bonds and other marketable debt securities
Subordinated debt (Note 21)
Cost allocable to the recorded pension provision (Notes 3-j and 20)
Other interest
Collection and payment services
Securities services
Fees paid-
Ceded to other entities and correspondents
Brokerage on asset and liability transactions
Other fees
Sales and futures transactions on fixed-income
securities and on interest rates (Notes 3-m and 26)
Sales and futures transactions on equity securities and
other assets (Notes 10 and 26)
Writedowns of securities and other
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The detail of the balances of this caption in the accompanying consolidated statements of income is as follows:
Social security costs
Net charge to in-house pension provisions (Notes 3-j and 20)
Contributions to external pension funds (Note 3-j)
Other expenses
The average total number of employees in the Group in 2004, 2003 and 2002, by category, was as follows:
Spanish banks-
- Executives
- Supervisors
- Clerical staff
- Abroad
Companies abroad
- Mexico
- Venezuela
- Argentina
- Colombia
- Peru
- Other
Pension fund managers
Other nonbanking companies
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The detail of the compensation earned in 2004, by item, is as follows:
Surname, First Name
Fernández Rivero, Jose Antonio
Loring Martinez de Irujo, Carlos
Telefónica de España, S.A.
Note:
Bank executive directors earned in this capacity €6,699 thousand, €3,360 thousand and €3,651 thousand, respectively in 2004, 2003 and 2002.
The detail of the compensation received by the executive directors in 2004, by item, is as follows:
Chairman
Chief Executive Officer
The detail of the compensation received by the executive directors in 2002, 2003, and 2004, were €10,847, €8,032 and €7,554 thousand, respectively.
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As of December 31, 2004 the detail of the welfare commitments to the members of the Board of Directors were as follows:
EXECUTIVE DIRECTORS
Of this accumulated amount €540 thousand has been booked in the consolidated income statement during 2004.
As of December 31, 2004 the detail of the welfare commitments to executive directors was as follows:
Thousandsof Euros
In 2004, €6,292 thousands of euros were recorded with a charge to the income for the year as welfare commitments.
In 2004, medical and accident insurance premiums were paid on behalf of members of the Board of Directors amounting to €95 thousand. Also, in 2004, bank executive directors earned retribution in kind amounting to €2 thousand. As well, in 2004 a cash settlement of the options allocated by BBV in the years 1998 and 1999 on behalf of its employees and directors in the “DOS 1000” program was executed. As a result of this, the Chief Executive Officer received the amount of €22 thousand.
The breakdown of the balances of this caption in the accompanying consolidated statements of income is as follows:
Technology and systems
Communications
Advertising
Buildings and fixtures
Taxes other than income tax
The balance of the “Other Expenses” account includes the fees accrued by the Group companies to their respective auditors, which amounted to €12,896 thousand in 2004 (€12,972 thousand and €15,789 thousand as of December 31, 2003 and 2002, respectively). Of the 2004 total, €6,766 thousand were incurred in auditing services performed by
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firms belonging to the Deloitte world organization and €1,920 thousand were incurred to other audit firms (€8,282 thousand and €1,833 thousand, respectively, as of December 31, 2003 and €5,784 thousand and €2,453 thousand, respectively, as of December 31, 2002).
In 2004 the Group engaged these firms to perform non-attest services, the detail of which is as follows:
The breakdown, by company, of the net balances of this caption in the accompanying consolidated statements of income is as follows:
Share in income and losses of companies accounted for by the equity method, net-
Share in income before taxes of nonconsolidated Group companies (Note 12):
ANIDA Desarrollos Inmobiliarios, S.L.
Consolidar Aseguradora de Riesgos del Trabajo, S.A.
Consolidar cía de seguros de vida, S.A.
BBVA Seguros Ganadero Cía. de Seguros de Vida, S.A.
Proyecto Mundo Aguilón, S.L.
Seguros Provincial, C.A.
Unitaria Inmobiliaria, S.A.
BBVA Seguros Ganadero Cía. de Seguros, S.A.
Other companies, net
Share in net income of associated companies (Note 11):
Correction for payment of dividends-
Final or prior years’ dividends
Interim dividends paid out of income for the year
The breakdown of the net balances of these captions in the accompanying consolidated statements of income is as follows:
Net special provisions (Notes 14 and 20) (*)
Other losses arising from pension and similar commitments (Notes 3-j and 20)
Other income arising from adjustment of deferred contributions (Note 3-j)
Gains on disposal of property and equipment and long-term
investments (Notes 10 and 14)
Recovery of interest earned in prior years
Adjustment of earnings due to currency redenomination (Note 3-b)
Net charge to the theoretical goodwill relating to Bradesco (Note 4)
Other extraordinary income (losses), net
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The 2004, 2003 and 2002 consolidated statements of changes in financial position are as follows:
Dividends paid
External capital contributions-
Purchase of own shares, net
Minority interests, net (Note 22)
Fixed-income securities
Marketable securities
Financing, net of investment, at credit institutions
Acquisition of long-term investments-
Purchase of investments in Group and associated companies (Notes 11 and 12)
Other asset items less liability items
From operations-
- Depreciation and amortization expense
- Net provision for asset writedown and to other special provisions
- Losses on sales of treasury stock, investments and fixed assets
- Minority interests
- Income of companies accounted for by the equity method, net of taxes
- Gains on sales of treasury stock, investments and fixed assets
Increase in capital
Sale of treasury stock
Sale of long-term investments-
Sale of investments in Group and associated companies (Notes 11 and 12)
Sale of property and equipment and intangible assets
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On March 22, 2002, BBVA notified the supervisory authorities of the stock markets on which its shares are listed that the Bank of Spain had commenced a proceeding against BBVA and 16 of its former directors and executives. These proceedings arose as a result of the existence of funds belonging to BBV that were not included in the entity’s financial statements until they were voluntarily regularized by being recorded in the 2000 consolidated statement of income as extraordinary income, for which the related corporate income tax was recorded and paid. These funds totaled Ptas. 37,343 million (approximately €225 million) and arose basically from the gains on the sale of shares of Banco de Vizcaya, S.A. and Banco Bilbao Vizcaya, S.A. from 1987 to 1992, and on the purchase and sale by BBV of shares of Argentaria, Caja Postal and Banco Hipotecario, S.A. in 1997 and 1998.
After dissolving the legal vehicles where the unrecorded funds were located and including the funds in its accounting records, BBVA notified the Bank of Spain of these matters on January 19, 2001. The Bank of Spain’s supervisory services commenced an investigation into the origin of the funds, their use and the persons involved, the findings of which were included in the supervisory services’ report dated March 11, 2002. On March 15, 2002, the Bank of Spain notified the Bank of the commencement of a proceeding relating to these events.
On April 9, 2002, the Central Examining Court Number 5 of the National Appellate Court ordered that these events be investigated in preliminary proceedings which are being conducted at the Court as brief proceedings 23/3 and previous procedures 251/02. Also, it required the Bank of Spain to stay the conduct of its proceeding until the criminal liability that may arise as a result of these events, if any, is determined.
On May 22, 2002, the Council of the Spanish National Securities Market Commission (CNMV) commenced a proceeding against BBVA, S.A. for possible contravention of the Securities Market Law (under Article 99 ñ) thereof) owing to the same events as those which gave rise to the Bank of Spain’s proceeding and the legal proceedings. On January 7, 2003, the CNMV stated that the proceeding was stayed until the final court decision on the criminal proceedings is handed down.
As of the date of preparation of these consolidated financial statements, none of the persons party to the proceedings or accused of the events referred to above is a member of the Board of Directors or the Management Committee or holds executive office at BBVA. Although the stayed proceedings, in which charges have not yet been brought, and the preliminary proceedings are at a very early stage, in view of the events and the surrounding circumstances, the Group’s legal advisers do not expect them to have a material effect on the Bank.
Pursuant to Article 127 ter of the Spanish Corporations Law as introduced by Law 262003, on July 17, modifying Securities Market Law 24/1988, on July 28, and the revised Corporations Law, for the purpose of enhancing transparency in listed companies, below is a list of the companies in which the Company’s directors have direct or indirect holdings and whose business activities are the same as, or similar or supplementary to, those making up the corporate purpose of BBVA, S.A.
In no case do the directors perform executive or management duties at these companies.
Below is a list of the companies in which the Company’s directors have direct or indirect holdings and whose business activities are the same as, or similar or supplementary to, those making up the corporate purpose of BBVA, S.A, as of December 31, 2004.
Holding
Company
Type ofHolding
Santander Central Hispano
Banco Popular Español
Indirect
Goirigolzarri Tellaeche, José Ignacio
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González Rodriguez, Francisco
Maldonado Ramos, José
Royal Bank of Scotland
Angel Vilá Boix (Telefónica de España, S.A.)
Banco Sabadell
BNP Paribas
Direct
(32.1) SUBSEQUENT EVENTS
Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after January 1, 2005 in conformity with the International Financial Reporting Standards (IFRSs) previously ratified by the European Union. Therefore, the Group is required to prepare its consolidated financial statements for the year ending December 31, 2005 in conformity with the IFRSs ratified by the European Union at that date.
Under IFRS 1, First-Time Adoption of International Financial Reporting Standards, the Group’s consolidated financial statements for 2005 must necessarily include, for comparison purposes, a consolidated balance sheet as of December 31, 2004, and a consolidated statement of income for the year then ended prepared in accordance with the methods established by the IFRSs in force as of December 31, 2005.
In order to adapt the accounting system of Spanish credit institutions to the new standards, on December 22 the Bank of Spain issued Circular 4/2004 on Public and Restricted Financial Reporting Standards and Model Financial Statements.
As a result of the foregoing, the Group is implementing a project for transition to IFRSs which includes, inter alia, an analysis of the accounting method differences, the selection of the accounting methods to be applied when alternative treatments are permitted and an assessment of the changes in reporting procedures and systems.
As of the date of preparation of these consolidated financial statements, the Group was in the process of preparing the information to enable it to estimate with reasonable objectivity the extent to which the consolidated balance sheet and consolidated statement of income for 2004 will differ from those to be prepared in the future in accordance with the accounting methods contained in the IFRSs in force as of December 31, 2005.
Public exchange offer for BNL shares
On March 28, 2005 the Board of Directors of BBVA approved the launch of a voluntary public exchange offer (the “Offer”) for 2,655,660,664.00 ordinary shares, each of Euro 0.72 nominal value, with full dividend rights, (the “Shares”) of Banca Nazionale del Lavoro (“BNL” or the “Bank”) currently not held by BBVA. The Shares represent 85.675% of the BNL authorised ordinary share capital, as set forth under the by-laws of the Bank, and 85.038% of the BNL total authorised capital (including saving shares).
The Offer´s consideration is represented by newly issued BBVA ordinary shares with full rights, of 0.49 Euros nominal value each. The exchange ratio shall be: 1 newly issued BBVA ordinary share for every 5 BNL ordinary shares tendered.
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The Board of Directors of BBVA also resolved to call a General Shareholders’ Meeting of BBVA to discuss and resolve on the following agenda:
The increase of the corporate capital of BBVA, for a nominal amount of Euro 260,254,745.17 by issuing 531,132,133 new ordinary Shares, without pre-emptive rights for existing BBVA shareholders, for the purpose of the exchange provided by the present Offer and, therefore, to be subscribed via a contribution in kind;
The approval by BBVA’s General Shareholders’ Meeting of the aforementioned capital increase was one of the conditions required prior to the beginning of the Acceptance Period. The BBVA’s General Shareholders’ Meeting, celebrated on june 14th, approved the capital increase.
On March 28, 2005 the Board of Directors of BBVA resolved upon the launch of a buy-back program of own shares pursuant to the EC Regulation no. 2273/2003 of the European Commission dated December 22, 2003, subject to the following conditions: (i) the number of shares to be purchased in the scope of the program shall not be higher, included the relevant net sale, than 3.5% of the stock capital of BBVA; (ii) the price of purchase shall be compliant with article 5 of the EC Regulation no. 2273/2003, and in any case it shall not be higher than Euro 14.5 per share; (iii) such program shall remain into force until September 30, 2005; (iv) the program targets, pursuant to art. 3 of such Regulation, will be the reduction of the stock capital of BBVA at the end of the program, by means of a redemption of the acquired shares that, at the end of the program, will remain within the portfolio of own shares of BBVA; (v) the program will be carried out through a company of the BBVA Group, named Corporación Industrial y de Servicios, S.L., who will be the one to issue the purchase, and as may be, sale orders regarding the shares which are the object of the program. Such orders will be dealt with by the brokerage department of BBVA. Effective chinese walls will be established between the persons responsible for the use of privileged information directly or indirectly related to BBVA and the persons responsible for the daily trading on treasury stock of BBVA.
Between April 18 and June 27, 2005, in the scope of the buy-back program of own shares mentioned above, BBVA purchased through Corporación Industrial y de Servicios, S.L. 11,213,799 shares of BBVA S.A. (which represent 0.331% of it’s capital stock).
The acquisition of a controlling shareholding in BNL is consistent with the growth strategy pursued by BBVA, aimed at improving the Group’s positioning in its core sectors of activity (retail banking in Spain, Portugal and South America, consumer credit and corporate banking), and at creating value for its shareholders.
BBVA believes that an expansion of the Group, also by means of geographic diversification of the profits, will lead to the creation of one of the leading banks in Europe, able to provide its customers with all the benefits of a global product offering.
The Italian market, to which BBVA has attributed a strong strategic value since becoming a shareholder of BNL during its privatisation, continues to represent for BBVA an extremely interesting opportunity, not only for its geographical proximity and cultural affinity with the Spanish market, but also, and predominantly, for the significant growth potential of the banking sector in Italy.
Thanks to its international presence and track record in integrating acquired entities, BBVA has a strong commercial know-how – already tested with success on similar customer bases – and significant expertise in improving management processes. BBVA believes it can successfully drive a restructuring process of BNL aimed at broadening and improving the quality of the product offering and increasing operational efficiency. This restructuring process would be based on the following key strategic initiatives:
a) Strengthening of the retail network and integration of the Wholesale Banking.
The initiatives envisaged by BBVA’s industrial plan with regards to BNL’s retail network aim at strengthening and increasing the effectiveness of such network through the rationalisation of the territorial intermediate structure and the implementation of more effective management processes.
As a result of such initiatives, pre-tax revenue synergies (net of restructuring costs) are expected to reach €14 million in 2005, €71 million in 2006 and €89 million in 2007 (or 2.6% of the BNL’s expected total income, based on selected analyst estimates). Investments required to achieve such synergies are estimated at approximately €135 million.
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b) Improvement of the operational efficiency.
BBVA’s industrial plan also envisages the continuation of the cost reduction policies already started by BNL’s current management. Initiatives in this area will involve both the network personnel, which will be refocused also through training and repositioning toward more service-oriented and front-office activities, and, more importantly, the central and territorial intermediate structures. The procurement of goods and services will be integrated within the BBVA organisation, with an expected increase in purchasing power and a reduction in costs. As a result of such initiatives, pre-tax cost savings are expected to reach €46 million in 2005, €130 million in 2006 and €193 million in 2007 (or 10.2% of the expected operating costs, based on selected analyst estimates). Investments required to achieve such synergies are estimated at approximately €255 million.
c) Transfer to BNL of systems, processes and competences of BBVA with respect to IT and risk management.
Finally, BBVA plans to share its systems, processes and expertise with BNL in the areas of IT and risk management. With regards to risk management, BBVA’s plan envisages an optimisation of the processes through the restructuring of the organisation and the introduction of new rules and procedures. In particular, BBVA will review the lending procedures to ensure a more thorough assessment and a more rapid response to clients’ loan requests. For this purpose, new structures and procedures will be implemented at the network level, with new scoring and rating tools. The new lending model is expected to reduce, once fully implemented, the loan loss charge level to 0.39%, a level in line with the 0.29% currently achieved by BBVA in Spain.
In terms of the existing NPL portfolio, provisioning will be increased—within the BBVA consolidated financials—by €845 million, raising the coverage ratio (calculated taking into account BNL provisions as well as the aforementioned €845 million within the BBVA balance sheet) to around 90%. The loan recovery activity will be significantly reviewed to reflect BBVA’s approach in the markets where it is present, setting up a dedicated business unit with specific expertise, training and incentive mechanisms as well as a new IT platform.
Total pre-tax synergies expected from the implementation of the business plan amount to €60 million in 2005, €201 million in 2006 and €282 million in 2007.
Based on BBVA EPS as per consensus with the Institutional Broker’s Estimate System estimates, BNL EPS as per selected analyst estimates and the synergies described above, the transaction is estimated to be neutral on BBVA earnings per share in 2005 and accretive in 2006 and 2007 by 1.2% and 2.1% respectively.
On April 8, BNL’s Board of Director’s met to analyse BBVA’s take over bid on BNL and approves it by unanimity, delivering afterwards a public statement in compliance with article 103 of the TUF.
BNL Board of Directors shares the business logic on which the offer is based, valuing also the advantages deriving for BNL and its shareholders. BNL, in fact, would become part, as a relevant factor, of a leading international banking group, while the continuity of the BNL operative strategic direction would be ensured, at the service of the national economy and the Italian clients. Based upon the opinion of the several financial advisors, the Board has considered fair the consideration offered by BBVA.
On April 13, the Commissione Nazionale per la Borsa (“CONSOB”) issued its “Nulla osta” to the publication of the prospectus on the public exchange offer for the ordinary share capital of Banca Nazionale del Lavoro. All the information on the offer can be consulted in this prospectus published on April 22 on the BBVA Group website www.bbva.com.
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The offer was subject to the Bank of Italy and European Commission approval. The complete estimated calendar is included in the prospectus of the offer mentioned above. The main key dates of this offer are the following:
Events
22 April 2005
• On this day the prospectus of the offer was available to BBVA shareholders (in accordance with the relevant event notified to the CNMV on April 14)
27 April 2005
• Favourable resolution from the European commission with respect to the operation previously notified.
13 May 2005
• Bank of Italy gives its approval.
18 May 2005
• After the authorization from the Bank of Italy, BBVA announced an Extraordinary Meeting of Shareholders of BBVA at first call on June 13 and at second call, on June 14 to approve the increase of the share capital to be subscribed via a contribution in kind, for the exchange of BNL shares.
14 June 2005
• Approval of share capital increase to be exchanged for a non cash consideration in Extraordinary Meeting of Shareholders of BBVA
15 June 2005
• Bank of Spain declared no opposition to the tender offer
20 June 2005
• Start the accepted period of the Banca Nazionale del Lavoro S.p.A. Public Exchange Offer
Other events
On June 9, 2005, Banco Bilbao Vizcaya Argentaria, S.A. has applied to the Mexican National Banking and Securit Commission for the listing of BBVA shares in the Mexican Stock Exchange.
The Shareholder’s Meeting held on February 26, 2005 approved, among other agreements, the following:
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As described in Note 2, the accompanying consolidated financial statements of the BBVA Group are presented in the formats stipulated by Bank of Spain circulars and were prepared by applying the generally accepted accounting principles for banks in Spain (“Spanish GAAP”), largely dictated by Bank of Spain. Such formats and accounting principles vary in certain respects from those generally accepted in the United States (“U.S. GAAP”). Following is a summary of the main differences between Spanish and U.S. generally accepted accounting principles:
• Significant valuation and income recognition principles under Spanish and U.S. GAAP
• Net income and Stockholders’ Equity reconciliation between Spanish and U.S. GAAP
• Consolidated Financial Statements
• Additional information required by U.S. GAAP
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts and allocations of assets and liabilities and disclosures of contingent assets and liabilities and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimated but any difference should not be material.
Following is a description of the most significant valuation and income recognition principles under Spanish and U.S. GAAP applicable to the financial statements of the Banco Bilbao Vizcaya Argentaria Group:
SPANISH GAAP
U.S. GAAP
Consolidation procedures and Investments in affiliated companies
(See notes 2-c, 3-e, 4, 11 and 12)
Consolidation Procedures
Spanish GAAP establishes three consolidation procedures:
• Global Integration Method (full consolidation): this method is applied to all the companies that are directly or indirectly more than 50% owned by the Bank or, if less than 50% owned, are effectively controlled by the Bank, whose business activities do not differ from those of the Bank and which constitute, together with it, a single decision-making unit.
• Generally, consolidation is required for, and is limited to, all investments that are directly or indirectly controlled by the investor, which is usually evidenced by ownership of a majority of the voting shares of the investee. Even when 50% of the voting interest is not owned, consolidation is appropriate if by contract, lease or agreement the investor has control over the venture.
There are several subsidiaries that belong to BBVA Banco Continental Group (Perú): Banco Continental, S.A. (parent company), Continental Bolsa, SAB, S.A., Continental, S.A. Sociedad Administradora de Fondos, Continental Sociedad Titulizadora, Inmuebles y Recuperaciones Continental. BBVA Groups holds 46% of Continental Group, however, BBVA Group has the control over Continental Group due to permanent shareholders’ agreements that give the control of the companies to BBVA.
The Global Integration method fully consolidates the financial statements of companies controlled by the parent company after eliminating all inter-company
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transactions and recognizing minority interest. This method follows the rules as expressed by ARB 51 and SFAS 94.
• Proportional Integration Method: this method is applied to all the companies whose line of business is directly related to those of the Bank, and which at least 20% owned by the Bank and managed jointly with another shareholders. This method is applied as follows:
• Proportional Integration Method is not generally permitted under U.S. GAAP.
1. Assets, rights, obligations, revenues and expenses of the joint venture are included in consolidated financial statements based on the Group’s holding in the joint venture. For example, if the Group’s holding is 30% then 30% of the joint venture’s assets are included in the consolidated financial statements.
2. The proportional method of consolidation does not result in the recognition of minority interest.
3. Inter-company transactions are eliminated to the extent of the interest held on the Joint Venture.
4. The cost of the parent investment in the joint venture is eliminated as the joint venture’s net assets. At the date of acquisition this difference will be allocated to assets or liabilities and the amount not allocated will be registered as Goodwill or Negative Goodwill. See explanation of differences about “Business combinations, goodwill and intangible assets” in section below.
5. Joint ventures that are less 20% owned by the Bank, are accounted for under Spanish GAAP using the equity method.
In note 32.2.D.3 we show the effect of the use the proportional consolidation method on our consolidated financial statements under Spanish GAAP.
• Equity Method: it is applied to all the companies that are directly or indirectly more than 50% owned by the Bank or, if lees than 50% owned, are effectively controlled by the Bank, whose business activities differ from those of the Bank (See Note 12 - Investment in Group Companies).
• These subsidiaries should be consolidated for U.S. GAAP. The effect of consolidating these companies is shown in Note 32.2.D.3 in this 2004 Form 20-F.
• Under Spanish GAAP there are no similar requirements.
• According to FIN 46R, it requires certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties, to be unconsolidated.
It also requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved.
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• Sometimes, BBVA Group maintains holdings in specific “Non-Group companies” with different purposes. Under Spanish GAAP despite the different purposes of these holdings and the different accounting treatment of them, as a portion of the specific holding should be classified as “Affiliated Company” (“Non-Group Companies” under Spanish GAAP”) the whole holding is classified as “Non-Group Companies” in the Balance Sheet. The purpose of a portion of the specific holding is to exercise a significant influence over the investee that will be held on a long-term basis. Therefore this portion is classified as “Affiliated Companies” (Long Term Investments in Note 11) and it is accounted for by the equity method. The purpose of any additional interest in an specific holding (“Non-Group company”) can vary (tax purposes, market purposes,…) and this portion is classified as Available for sale or Trading (“Other Investments in associated companies “ in Note 11).
• Trading securities are stated at market value, and differences between market value and book value are reported in the statement of income.
• Available-for-sale securities are measured at fair value and unrealized gains and losses, including the effect of hedges, are reported as a net amount within Accumulated Other Comprehensive Income.
• Some of the holdings in “Non-group Companies” classified as “Available for Sale” are hedged. BBVA Group trades equity swaps to hedge market risk. The strike prices of equity swaps are always the same as the carrying values of the hedged securities at the inception of the hedges. This means that any variation in the fair value of the hedged item (securities) will be very similar to the variations in the fair value of the equities. This is due to the fact that derivative instruments used are rolled over every month. Under Spanish GAAP the accounting treatment is as follows:
• All settlements produced by the equity swaps are recorded as an asset or a liability on the balance sheet.
• Net effect in the income statement is nil.
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Since January 1, 2002, goodwill is generally no longer amortized, but instead it is subject to an impairment test at least annually.
For the purpose of testing goodwill for impairment, all goodwill acquired in a business combination shall be assigned to one or more reporting units as of the acquisition date.
Negative goodwill are recorded in the statement of income after appropriately reducing the assigned values at the recorded assets.
Positive goodwill is amortized over the period estimated to be benefited not exceeding 20 years (reasons for periods in excess of five years should be explained in notes to the financial statements). Under special circumstances, and with the authorization of the Bank of Spain, goodwill may be charged-off against reserves.
Negative goodwill are registered in the balance sheet
Intangible assets must be recognized as assets apart from goodwill.
Intangible assets that have indefinite useful lives are not amortized but rather are tested at least annually for impairment. Intangible assets that have finite useful lives are amortized over their useful lives.
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The gains or losses arising from trading transactions arranged outside organized markets are not recognized in income until they are effectively settled. However, provisions are recorded with a charge to income for unrealized net losses. These provisions are calculated independently for each risk (interest rate, equity price and currency), by grouping them by currency, then netting unrealized profits and losses for each group, and then adding only the net losses of each group.
The gains or losses arising from hedging transactions are accrued symmetrically to the revenues or expenses arising from the hedged items, with a balancing entry under “Other Assets” or “Other Liabilities” in the consolidated balance sheets.
(a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, and its gains or losses are recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged.
(b) a hedge of the exposure to variable cash flows of a forecasted transaction. In this case the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.
(c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The gain or loss of these derivatives is reported in other comprehensive income (outside earnings) as part of the cumulative translation adjustment. This amount shall be subsequently reclassified into earnings when the hedged operation affects earnings.
Net lending
Impairment
Loans are identified as impaired and placed on a non-accrual basis when any interest or principal is past due for 90 days or more or when it is determined that the collectibility of interest or principal is doubtful. It is doubtfully collectible when the borrower is incurring continued losses, frequent delays in payments, cannot obtain new financing, is reducing its stockholders’ equity, or other reasons based on available information.
At the beginning, only the amounts past due for 90 days or more are classified as non-performing. The entire loan is classified as non-performing if one of the following conditions is met:
• Amounts classified as non-performing exceed 25% of the outstanding balance. Additionally, all outstanding loans to a particular customer would be classified as non-performing if more than 25% of the outstanding credit to the customer is non-performing.
A loan is impaired when, based on available information and facts, it is probable that a creditor will be unable to collect all the amounts due according to the contractual terms of the loan agreement.
The total amount of loans identified as impaired is classified as non-performing and placed on a non-accrual basis.
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• Any principal is past due more than 6 months for loans to individuals or 1 year for other loans.
• The loan is deemed uncollectible.
A loan could be on non-accrual status even if it is classified in part as a performing loan.
Pursuant to Bank of Spain regulations, once any portion of a loan is classified as non-performing, a specific loan loss allowance is required to be set up, with scheduled increases to the allowance based on a calendar of the time elapsed since the first event of nonpayment or for which collection is considered to be doubtful. Based on management’s assessment banks may elect to record allowances in excess of this minimum requirement.
A generic allowance of 1% of total loans, guarantees, private sector debt securities and contingent liabilities must also be made. This allowance is limited to 0.5% for fully secured mortgage loans.
Additionally, a Country Risk allowance must be recorded to cover the transfer risk arising from outstandings loans to borrowers in countries falling into certain risk categories established, including intercompany transactions.
Finally, the Bank of Spain requires an allowance for the statistical coverage of credit losses. The amount of this allowance depends on calculations made using different coefficients for each category of the loan portfolio and on the net charges to income statement related to other loan losses.
The allowance for loan losses represents managements’ best estimate of probable losses in the loan portfolio.
The reserve estimation process is judgmental and includes consideration of identified losses as well as reasonably expected probable losses based on judgmental assessment of historical trends, credit concentrations and other factors. The allowance for loans losses for individual loans specifically reviewed for impairment is determined by one of the following:
• The present value of the expected future cash flows, discounted at the loan’s effective interest rate,
• The loan’s observable market price, or
• The fair value of the collateral if the loan is collateral dependent.
The allowance for loan losses for a group of loans collectively reviewed for impairment is based on representative historical losses updated to reflect current trends and conditions.
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Loan origination Fees
Loans origination fees are recorded when collected and charges direct origination costs when incurred.
Under SFAS 91 loans origination fees and certain direct loans origination costs should be recognized over the life of the related loan as an adjustment of yield.
Transfers of Financial Assets
General Criteria
Those transactions in which transferor transfers all rights and liabilities of a financial asset or group of financial assets will be considered as “transfer of financial assets”. These transactions must comply with the following requirements to be a “transfer of financial assets”:
a) All the rights owned by the transferor over the financial asset, including management or legal defense, will be transmitted to the transferee.
b) The transmission will be for the remaining life of the financial asset
c) The transmission will be documented in a written contract.
d) The contract will specify transferor does not assume any responsibility over the credit risk of financial asset and that any modification of the conditions of financial asset will only affect the transferee.
e) The transferor will not issue guarantees or repurchase agreements.
f) The transferor will not accept the commitment of paying in advance to the transferee before the debtor pays. It means, the transferor will not finance to the buyer.
g) The transferee will not have any limitation to manage, pledge or transfer the financial asset.
h) If the transferee puts the transferor in charge of the management and legal defense of transferred financial asset, this engagement should be done under revocable contract.
All the transfers of assets that satisfies the conditions described above will be accounted for as a sale:
a. All assets sold will be derecognized
b. All assets obtained and liabilities incurred will be initially recognized at fair value
c. Any gain or loss will be recognized in earnings.
A transfer of financial assets (or all or a portion of a financial asset) in which the transferor surrenders control over those financial assets shall be accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange.
The transferor has surrendered control over transferred assets if and only if all of the following conditions are met:
a. The transferred assets have been isolated from the transferor—put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership.
b. Each transferee, has the right to pledge or exchange the assets (or beneficial interests) it received, and no condition both constrains the transferee (or holder) from taking advantage of its right to pledge or exchange and provides more than a trivial benefit to the transferor.
c. The transferor does not maintain effective control over the transferred assets through either (1) an agreement that both entitles and obligates the transferor to repurchase or redeem them before their maturity or (2) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.
Upon completion of a transfer of assets that satisfies the conditions to be accounted for as a sale, the transferor (seller) shall:
a. Derecognize all assets sold
b. Recognize all assets obtained and liabilities incurred in consideration as proceeds of the sale, including cash, put or call options held or written (for example, guarantee or recourse obligations), forward commitments (for example, commitments to deliver additional receivables during the revolving periods of some securitizations), swaps (for example, provisions that convert interest rates from fixed to variable), and servicing liabilities, if applicable.
c. Initially measure at fair value assets obtained and liabilities incurred in a sale or, if it is not practicable
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to estimate the fair value of an asset or a liability, apply alternative measures.
d. Recognize in earnings any gain or loss on the sale.
Securitizations
Securitizations that meet the criteria described above will be accounted for as a sale.
All financial assets transferred will be derecognized and all financial assets obtained and liabilities incurred by the transferor will be recognized at fair value.
Spanish GAAP does not consider Qualifying Special Purpose Entities as contemplated by SFAS 140
If a transfer of financial assets in exchange for cash or other consideration (other than beneficial interests in the transferred assets) does not meet the 3 criteria for a sale describe above, the transferor and transferee shall account for the transfer as a secured borrowing with pledge of collateral.
Securitizations that meet the three criteria described above are accounted for as a sale.
All financial assets obtained or retained and liabilities incurred by the originator of a securitization that qualifies as a sale shall be recognized and measured as provided at fair value.
Qualifying Special Purpose Entities are not consolidated into the financial statements of the transferor or its subsidiaries.
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Guarantees, Contingent liabilities and Commitments
All of the following are recorded under memorandum accounts for the maximum amount committed by the Group.
If any fees are received at the inception of these guarantees, the total amounts are recorded in the caption “Other Liabilities” and are amortized and recognized into income over the lives of the contracts.
Additionally, for all guarantees representing potential risks for the Group a provision is recognized following the same provisioning criteria of fair value or potential loss as applied to other relevant risks (i.e. customer loans).
1. Contingent liabilities:
a. Rediscounts, endorsements and acceptances
Consist of rediscounts of bill receivables, in which the Group supports certain risk, and the full amounts of the bills are recorded, except for rediscounts of Spanish Government securities.
b. Assets assigned to sundry obligations
Bank of Spain regulations request the pledge of certain assets, mainly debt securities, to allow Banks to operate in several kind of transactions (taking deposits from the public, deal in certain markets, etc.) These assets are accounted for under “Debentures and other fixed income securities” caption of the asset side of the balance sheet, and valued as any other securities. The amount disclosed under memorandum accounts represents their net carrying value.
Since January 1, 2003, the inception of a guarantee, the guarantor shall recognize in its statement of financial position a liability for the fair value of the guarantee.
When a guarantee is issued as part of a transaction with multiple elements with an unrelated party, the liability recognized at the inception of the guarantee should be an estimate of the guarantee’s fair value, amounting to the greater of:
a. The fair value amount, as:
1. The premium that would be required by the guarantor to issue the same guarantee in a standalone arm’s-length transaction with an unrelated party, or
2. In the absence of observable transactions for identical or similar guarantees, expected present value (the sum of the probability-weighted present values in a range of estimated cash flows, all discounted using the same interest rate convention, according to FASB Concepts Statement No. 7), or
3. Fair value consistent with par. 18 of SFAS 116 criteria.
b. The contingent liability amount required by par.8 SFAS 5.
When a guarantee is issued in a standalone arm’s-length transaction with an unrelated party, the liability recognized at the inception of the guarantee should be the premium received or receivable by the guarantor.
2. Guarantees and other sureties
a. Guaranties promises
Amounts irrevocably committed to be formalized and guaranteed in the future.
b. Commercial guarantees
Amounts committed to guaranties in connection with the completion of commitments undertaken by the usual business of a client (for example, the guaranties of completion of government contracts, or performance guarantees).
c. Financial guarantees
Commitments by which the Bank undertakes a contingent obligation to make future payments if specified triggering events or conditions occur. Fair value, taken as the premium received upon issuance of the guarantee, is recorded as a liability and accrued to
The loss contingency for this item refers to unasserted claims or assessment, but there has been no manifestation by the potential claimant (Bank of Spain) of an awareness of a possible claim or assessment, and it is not considered probable either. Hence this item is out of scope of FIN 45 accounting provisions.
Out of scope of FIN 45, but subject to disclosure
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income over the life of the guarantee. Additionally, this balance is subject to provision.
d. Doubtful guarantees
Collects the amount of both commercial and financial guarantees, which the Group expects that will be exercised either due to occurrence of triggering events or other reasons. A provision is recorded accordingly.
e. Credit default swaps
Sales of credit default swaps; the maximum committed amount is recorded under memorandum accounts. Premium received is accounted for as a liability and the swap is marked to market. Several of these swaps are matched to identical swaps acquired; the remaining are valued at the lowest of net carrying amount or fair value, recording any necessary provisions under “Allowance for losses on futures transactions”.
3. Other contingent liabilities
a. Documentary credits
Commitments undertaken by which the Group stands ready to perform over the delivery of documents, including commercial letters of credit, stand-by letters of credit and financial letters of credit. The premium received is recognized as a liability, and additionally, the balance of risk bearing transactions is subject to provisioning
b. Other contingent liabilities
c. Doubtful contingent liabilities
Analogous to item 2.d above.
4. Commitments
a. Sales with repurchase agreements
The amount of the commitments to repurchase assets previously sold is recorded as a liability for the full amount the Bank committed to purchase them.
See general criteria above
Out of scope of FIN 45, but subject to disclosure. Falls within SFAS 133 scope.
Commercial letters of credit and other loan commitments (guarantees of funding) are not included in the scope of FIN 45.
Financial letters of credit are subject to FIN 45 provisions.
Subject to disclosure requirements.
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Accounting practices used by the Bank in preparing the consolidated financial statements conform with Spanish GAAP, but do not conform with U.S. GAAP. A summarized reconciliation of stockholders’ equity as of December 31, 2004, 2003 and 2002 and net income for the years 2004, 2003 and 2002 to U.S. GAAP is set forth below.
The following tables set forth the adjustments to consolidated net income and to consolidated stockholders’ equity which would be required if U.S. GAAP had been applied to the accompanying consolidated financial statements:
Item
#
As reported in the annual report to stockholders in the statutory approved financial statements
Adjustments to conform to U.S. GAAP:
Business Combination with Argentaria: Amortization of surplus allocated to specific assets and liabilities
Reversal of the net effect of the restatement of fixed assets and equity securities and valuation of assets received in payment of debts
Effect of following the equity method of accounting for investments in affiliated companies
Pension plan cost
Early retirements
Termination indemnities
Accounting of goodwill
Gains on transactions with parent company shares and stock options owned by subsidiaries accounted for as income for the year
Loan adjustments
Valuation of investment securities
Expenses of capital increases
Start up expenses
Derivative instruments and hedging activities (SFAS 133)
Translation of financial statements in high-inflation countries
Tax effect of above mentioned adjustments
Effect of following SFAS 109 in the accounting for income taxes for each year
BBV Brasil transaction
Net income in accordance with U.S. GAAP
Other comprehensive income, (loss) net of tax:
Foreign currency translation adjustments
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period, net of tax
Reclassification adjustment, net of tax
Derivative instruments and hedging activities
Comprehensive income (losses) in accordance with U.S. GAAP
Net income per share (Euros)
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STOCKHOLDERS’ EQUITY
As reported under Spanish GAAP in the accompanying consolidated balance sheets (Note 2-d)
Business Combination with Argentaria Purchase Argentaria Effect
Effect of adjustments to conform to U.S. GAAP for investments in affiliated companies
(Gains) losses on transactions with parent company shares and stock options owned by subsidiaries accounted for as income for the year
Reduction for employee loans issued to purchase shares of capital Stock
Effect of following SFAS 109
Stockholders’ equity in accordance with U.S. GAAP
The differences included in the tables above are explained in the following items:
1. Business Combination with Argentaria-
As described in Note 1, Banco Bilbao Vizcaya, S.A. and Argentaria, Caja Postal y Banco Hipotecario, S.A. (Argentaria) merged, being January 28, 2000 the date from which such merger was legally effective. The accounting of this business combination under Spanish GAAP was accounted for using the method of pooling of interest and therefore no goodwill was accounted for. Since the transaction did not comply with the requirements of APB 16 for pooling of interest method, under U.S. GAAP this business combination was accounted for using the purchase method. The excess of the fair value of the new shares issued in exchange for the Argentaria shares over the net worth of Argentaria under U.S. GAAP as of the date of the merger, amounted to approximately €6,315,622 thousand and
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was calculated considering the necessary adjustments to the net worth of Argentaria as of January 28, 2000 under Spanish GAAP:
Approximate Argentaria net worth as of January 28, 2000 under Spanish GAAP
Reversal of the net effect of the restatement of fixed assets and equity securities
Reduction for employees and third party loans issued to purchase shares of capital stock
Goodwill amortization adjustments
Up-front premium reversal
Effect of adjustments to conform to U.S. GAAP for investments in affiliated Companies
Other adjustments
Approximate Argentaria net worth as of January 28, 2000 under U.S. GAAP
- Revaluation of property and equity securities
Certain of the Spanish and foreign consolidated companies had stepped up (increased) the cost and accumulated depreciation of property and equipment and, where appropriate, the carrying values of their equity investment securities pursuant to the relevant local legislation. Also, the buildings and equity securities owned by certain of the companies in the Group, whose shareholders´ meetings adopted merger resolutions in 1991, were stepped up. Under U.S. GAAP these step ups are not permitted to be reflected in the financial statements.
- Employee and other third party loans
Certain Group banks granted loans to shareholders, employees and customers for the acquisition of Argentaria, Caja Postal y Banco Hipotecario, S.A. shares. Under Spanish GAAP, these loans were recorded in the consolidated financial statements under the caption “Credit, Loans and Discounts”. Under U.S. GAAP, these loans should be recorded as a reduction of stockholders´ equity because the only recourse for collection was the shares themselves.
- Goodwill
The general policy of the Group was to amortize goodwill over a maximum period of 10 years. However, a different period was used to amortize goodwill in some of the subsidiaries acquired. For purposes of calculating the effect of applying U.S. GAAP, goodwill arising on acquisitions has been amortized in 10 years.
Additionally, in 1998 and as a result of the merger, goodwill from Banco Exterior de España, S.A. was fully written off for Spanish GAAP purposes. Under U.S. GAAP the goodwill is amortized over the estimated economic life as there was no economic or fair value basis for the impairment made under Spanish GAAP.
- Up-front premium reversal
In 1998 the Bank arranged hedging transactions for which it paid a premium, which was recorded under the “Extraordinary Losses” caption in the statement of income for 1998, to mitigate the adverse effect of the negative spread that arise between the average return on the mortgage loans financed by certain mortgage bonds and the fixed interest rates of such mortgage bonds. Under U.S. GAAP, the premium was recognized at inception as an asset, amortized over the life of the hedging transaction under FAS 80 and that upon adoption of FASB 133 the derivative has been recorded at fair value through income, as it does not qualify for hedge accounting under U.S. GAAP.
- Valuation of investment securities
Under SFAS 115, available-for-sale securities must be recorded at market value against stockholders´ equity.
- Investments in affiliated Companies
Under Spanish GAAP, investments in non-consolidated listed affiliated companies owned over 3% and in non-consolidated unlisted affiliated companies owned over 20% are recorded by the equity method. Under U.S. GAAP investments in affiliated companies over 20% but less than 50% are accounted for by the equity method and those exceeding 50% by the global integration method. Listed investments of less than 20% are accounted for at market value.
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The excess of the fair value of the new shares issued in exchange for the Argentaria shares over the net worth of Argentaria, was allocated to the following specific items:
Thousands of
Euros
Net Lending
Investment Securities-Held to Maturity
Premises and Equipment
Long Term Debt
Tax Effect
Goodwill
For U.S. GAAP purposes, BBVA amortizes the excess of the fair value assigned to the specific items over their remaining life. The amortization of the excess allocated to specific assets and liabilities amounts €18,868 thousand (net of tax), €55,899 thousand (net of tax) and €154,690 thousand (net of tax) in 2004, 2003 and 2002, respectively.
Up to December 31, 2001 BBVA amortized the goodwill on a straight line basis over a period of 25 years. From January, 2002 BBVA stopped the amortization of the remaining goodwill pursuant to the SFAS 142 and it has been assigned to different Reporting Units and tested for impairment as described in Item 32.2.B.5.
2. Revaluation of property and equity securities and valuation of assets received in payment of debt -
As described in Notes 3-e, 3-h, 14 and 24, certain of the Spanish and foreign consolidated companies restated the cost and accumulated depreciation of property and equipment and, where appropriate, the carrying values of their equity investment securities pursuant to the relevant legislation. Also, the buildings and equity securities owned by certain of the companies in the Group, whose Shareholders’ Meetings adopted merger resolutions in 1988, were restated on the basis of the principles explained in Note 24. Under U.S. GAAP these revaluations are not permitted to be reflected in the financial statements.
In accordance with Spanish GAAP, fixed asset depreciation is computed on the restated value and the total amount charged to income is deductible for corporate income tax purposes. In addition, results on sales or dispositions of both fixed assets and equity investments are determined as the difference between the selling price and the net restated value.
The amounts of the adjustments indicated below have been calculated to reflect the reversal of the additional depreciation on the revalued property and equipment (€9,312 thousand, €9,757 thousand and €10,088 thousand in 2004, 2003, and 2002, respectively) and the additional income that would have resulted if the Group had not restated the equity securities and fixed assets that have been sold (€15,033 thousand, €11,248 thousand and €58,273 thousand in 2004, 2003 and 2002, respectively). The adjustment to stockholders’ equity reflects the reversal of the unamortized revaluation surplus.
Assets received in payments of debt
Under Spanish GAAP, these assets are recorded at the lower of the book value of the assets used to acquire them or market value, net, initially, of any provisions covering the assets received, up to 25% of that value. In accordance with Bank of Spain regulations, additional provisions are recorded in the years following foreclosure of the assets based on their age, type of assets and appraisal by independent appraisers.
The provisions recorded with a charge to the “Extraordinary Losses” caption in the accompanying consolidated statements of income are presented as a reduction of the balance of the “Property and Equipment Other Property” caption in the accompanying consolidated balance sheets (Notes 14 and 28-g).
Under U.S. GAAP, this provision should not be recorded, therefore an adjustment to net income and stockholders’ equity reflects the reversal of that provision up to the appraisal value of the asset.
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This adjustment supposes a decrease in net income of €5,746 thousand and increase in net income of €28,973 thousand, in 2004 and 2003, respectively, and an increase in stockholders’ equity of €23,227 thousand and €28,973 thousand, in 2004 and 2003, respectively.
3. Equity investments-
As indicated in Note 3-e, under Spanish GAAP, investments in non-consolidated listed affiliated companies owned over 3% and in non-consolidated unlisted affiliated companies owned over 20% are recorded by the equity method.
Under U.S. GAAP, investments in affiliated companies over 20% but less than 50% are accounted for by the equity method and those exceeding 50% are consolidated. Listed investments of less than 20% are accounted for at fair value (Note 32.2.A).
Except for BNL, all affiliates in which the Group holds an ownership interest of less than 20% and are accounted for by the equity method according to Spanish GAAP, must be accounted for at market value, if the securities have readily determinable market value, according to U.S. GAAP. If the securities do not have readily determinable market value, they are accounted for at cost under U.S. GAAP.
In this adjustment we change the valuation of these holdings (less than 20%) from the equity accounting method to lower of cost or market. The final adjustment to meet SFAS 115 is done, together with all other securities, in the Valuation of Investment Securities described in Item 9 below.
This adjustment reflects the reversal of effects in net income and stockholders’ equity of accounting by the equity method holdings in affiliated companies less than 20% and in which the Group does not have significant influence. This adjustment includes:
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Banca Nazionale del Lavoro S.p.A.
In 2004, 2003 and 2002, the Group holds an ownership interest in BNL of less than 20%. According to Spanish GAAP BNL was accounted for by the equity method in these three years.
Under U.S. GAAP, BNL was included in the available for sale portfolio in 2003 and 2002. In 2004, due basically to a shareholder’s agreement reached in March 2004 (that let BBVA control the 28.3% of BNL’s capital and have 8 of a total of 15 directors in the Board of Directors) and to the Public Exchange Offer announced for the shares of BNL (see Note 32.1.), the Group accounted for by the equity method the ownership interest in BNL.
The APB 18, “The Equity Method of Accounting for Investments in Common Stock”, states that an investment in common stock of an investee that was previously accounted for on other than the equity method may become qualified for use of the equity method by an increase in the level of ownership described in paragraph 17 (i.e., acquisition of additional voting stock by the investor, acquisition or retirement of voting stock by the investee, or other transactions). When an investment qualifies for use of the equity method, the investor should adopt the equity method of accounting. The investment, results of operations (current and prior periods presented), and retained earnings of the investor should be adjusted retroactively.
If BNL would have been accounted for by the equity method in 2003 the net income and the stockholder´s equity of the Group would not have had any significant variation. In 2002 the net income and the stockholder´s equity of the Group would have decreased by €30,484 thousand and the basic and the diluted earning per share would have decreased from 0.577 to 0.568.
4.1. Pension plan cost, early retirements -
Pension plan cost-
All personnel employed in Spain are entitled to pension benefits, in addition to Social Security provided by the State.
As of December 31, 1988, the total liability for retired and active employees was recorded by a charge to income and to the merger reserves adopted by some companies in 1988.
In 1991, the Group recalculated the actuarial liability, changing certain assumptions and varying certain of the items included in the pensionable basis (wage concepts included to determine the cost of pensions). Gains and losses derived from this recalculation were covered with charges to “Retained earnings and other reserves”. Actuarial gains and losses arising in subsequent years until 1999 were recorded in the statement of income.
In 2000, as a consequence of the externalization process, in which the financing system was modified through the signature of a collective agreement and new valuation assumptions were used, a difference arose which represents the discounted present value of the contributions yet to be made to the external pension funds. In addition, in 2001 the Plan was amended, resulting in increasing benefits granted to the employees.
Because of the mentioned process in year 2000, these obligations are covered through Defined Contribution Pension Plans, and through Insurance Policies adapted to the current regulation in Spain for the externalizing of retirement commitments, which under SFAS No. 87 are treated as annuity contracts for the purpose of that Statement.
Under U.S. GAAP, SFAS 87 requires unrecognized net gain or loss and unrecognized prior service cost to be amortized by charges to income in a period not exceeding the average remaining service period of active employees or the average remaining life expectancy of retired participants.
These amounts are being amortized over a maximum period of 14 years in the case of external pension plans and 9 years in the case of insurance contracts in accordance with Spanish legislation (under U.S. GAAP maximum period for amortization is higher than under Spanish GAAP both for active employees and inactive participants of the plans). These periods include the year 2000, in which the first installment was paid. The Group has recorded an increase in net income in 2004 as amortization of these differences of €1,549 thousand (this supposed a decrease in net income of €75,661 thousand and €99,665 thousand in years 2003 and 2002, respectively). After previous years adjustments, unrecognized net gain or loss and unrecognized prior service cost as of December 31, 2004 amount to €689,178 thousand (€746,731 thousand and €849,980 thousand in years 2003 and 2002, respectively). As of December 31, 2002 all the amounts corresponding to these obligations of the Pension Plans have already been paid.
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For year 2004 contributions made by companies in Spain to the defined contribution pension plans amount to €37,834 thousand (€40,123 thousand and €43,037 thousand in years 2003 and 2002, respectively). Additionally, costs of annuity contracts charged to income in 2004, amounts to €19,143 thousand (€28,243 thousand and €36,715 thousand in years 2003 and 2002, respectively).
Pension plans of BBVA Bancomer
Obligations for pensions and other postretirement benefits in BBVA Bancomer are covered mainly under defined benefit pension plans, whereas others are covered under defined contribution pension plans. Both types of pension plans are carried out as internal provisions.
The following table is the reconciliation in the defined benefit pension plan of the Projected Benefit Obligation:
Change in benefit obligation:
Projected benefit obligation (PBO) at the beginning of the year
Initial Adjustment
Prior service cost
Total service cost at year end
Interest cost
Benefits paid
Gains & losses
Settlements
Foreign currency exchange rate changes
Projected benefit obligation (PBO) at the end of the year
Weighted average actuarial assumptions used in the accounting for the defined benefit pension plan are as follows:
Life Expectancy table before retirement
Life Expectancy table after retirement
Discount rate
Salary increase rate
Rate of increase in taxation groups of Social security benefits
Expected return on assets
Those actuarial assumptions were approved by Comisión Nacional Bancaria y de Valores (National Banking and Securities Commission).
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A reconciliation of the fair value of plan assets, is as follows:
Change in Plan Assets:
Healthcare
benefits
Fair Value of Plan Assets at beginning of the year
Actual return on plan assets
Transfer from Other Entities
Employer Contribution
Plan participants’ contribution
Fair Value of Plan Assets at the end of the year
Funded status as of December 31, 2004 and 2003:
Funded status December 31:
Fair Value of Assets
Accumulated Benefit Obligations
Overfunded (unfunded) status of ABO
Unrecognized Prior Service Cost
Prepaid (Accrued) Benefit Cost
Amounting recognized in the financial statements at December 31, 2004 and 2003 are as follows:
Minimum Liability
Intangible Assets
Net amount recognized at the end of the year
The disclosure of Net Periodic Cost during 2004 and 2003 is as follows:
Net Periodic Cost (Income)
Prior Service Cost
Service cost at year end
Expected return on Asset
Net Periodic Cost
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Contribution expected to be paid during the next fiscal year:
Plan Assets
Investment strategy
The Company’s policy is to invest the assets in a prudent manner for the exclusive purpose of providing benefits to participants. The Company’s investment strategy is designed to provide a total return on assets that, over the long-term, increases the ratio of assets to liabilities. The investment strategy uses allocation as a principal determinant for establishing the risk/reward profile of the assets. This strategy must follow some requirements established by Mexican legislation.
According to Mexican legislation, the pension commitments can be hedged by:
- Defined benefit pension plan
The Pension Plan asset allocation at December 31, 2004 and 2003 by asset category is as follows:
Asset Category
Percentageof PlanAssets
at December31, 2003
Mexican Federal Government securities
Other Debt securities
- Long services bonus
at December31, 2004
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- Other post-retirement benefits
Projected Benefit Payments
Benefit Payments projected to be made from the Pension Benefit Plan and Healthcare Benefit Plan are as follows:
Pension
BenefitPlan
2010
2011
2012
2013
2014
Defined contribution Plan
Also, BBVA Bancomer has an established pension plan denominated “Defined Contribution”, to which defined contributions are made based on a payroll percentage as of March 1, 2001. Over the long term this plan will replace the defined benefits plan, which generates the previous liability, and currently 12,956 employees participate in this plan. Apart from the defined benefit monthly retirement pension, benefits will be paid in the event of early retirement, death, or total permanent disability, through defined contributions to a personal employee fund.
During year 2004, 1,593 employees (1,277 employees and 2,166 employees in year 2003 and 2002, respectively) whose pension obligations were covered under the defined benefit pension plan moved to the defined contribution pension plan. As a consequence of this transfer, provision allocated in the defined benefit pension plan was reallocated in the provision for the defined contribution pension plan. Therefore, from the total increase of the internal provisions for the defined contribution pension plan in year 2004 €86 thousand (€112 thousand and €2,412 thousand in years 2003 and 2002, respectively) came from the transfer of provisions from the defined benefit pension plan.
In addition of this transfer, the cost recognized for the defined contribution pension plan in year 2004 amounts to €5,870 thousand (€7,327 thousand and €9,474 thousand in 2003 and 2002, respectively).
At December 31, 2004, 2003 and 2002, the assets of this plan and its obligations are €44,813 thousand (Mexican $680,367 thousand), €41,456 thousand (Mexican $588,190 thousand) and €45,627 thousand (Mexican $500,532 thousand), respectively.
4.2. Early retirements-
As indicated in Note 2-g, in 2004, 2003 and 2002 the Group offered certain employees the possibility of taking early retirement before the retirement age stipulated in the current collective labor agreement. In 2004 the Group charged the total cost arising from the early retirement to the “Extraordinary Losses” caption, instead of to the “Retained earnings” in 2003 and 2002.
Under U.S. GAAP, the costs incurred for early retirements should be recognized in net income at the moment when the early retirement actually takes place.
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This adjustment registered in net income the cost from early retirements recorded in reserves under Spanish GAAP and amounted to €799,416 thousand and €499,177 thousand in 2003 and 2002, respectively. In 2004 no adjustment is needed in the reconciliation to U.S. GAAP.
Otherwise, this adjustment to net income registers in net income the cost of changing the cash-basis procedure applied by certain Group banks to accrual principle (€200 thousand, €174 thousand and €432 thousand in 2004, 2003 and 2002, respectively).
4.3. Termination indemnities-
As indicated in Note 3-k, as required by Bank of Spain Circular 5/2000, the Group has recorded an in-house provision to cover the contractual termination benefits for terminations or dismissals additional to those provided for by current legislation on a general basis. In addition, several companies of the Group have recorded additional provisions to cover future reorganization costs (basically termination indemnities). Under U.S. GAAP, an employer that provides contractual termination benefits shall recognize a liability and a loss when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated.
As of December 31, 2004, 2003 and 2002 there is no labor force reduction plan. Therefore, under U.S. GAAP these provisions should be reversed. This adjustment gives rise to an increase in net income of €20,503 thousand and €2,083 thousand in 2004 and 2003, respectively, and a decrease in net income of €3,276 thousand in 2002, and an increase in stockholders’ equity of €60,076 thousand, €39,573 thousand and €37,490 thousand in 2004, 2003 and 2002, respectively.
5. Accounting of goodwill-
The disclosure of this adjustment is as follows:
Goodwill charged to reserves in 1998 and 1999
Different period of amortization of goodwill reversed
Reversal of amortization under SP GAAP
Amortization under Spanish GAAP not reversed under U.S. GAAP
Impairment under U.S. GAAP
Sale of BBVA Brasil
Cancellation Negative Goodwill in consolidation
Adjustment 5 in reconciliation to U.S. GAAP (*)
The mains reasons that cause a difference between Spanish GAAP and U.S. GAAP in the amount of goodwill are the following ones:
Goodwill that arose in 1998 and 1999 as a result of mergers and acquisitions through share exchanges was amortized in full with a charge to reserves, which was not acceptable under U.S. GAAP. Under U.S. GAAP the goodwill was amortized until 2001 over a period of ten years except for the goodwill arising in 2000 in the merger of Banca Catalana, S.A., Banco de Comercio, S.A., Banco de Negocios Argentaria, S.A. and Banco de Alicante, S.A. where the economic life was five years. Since 2001, as it is required in SFAS 142, goodwill is not amortized.
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In 1996 and 1997, BBV Group accounted for the impairment of part of the goodwill relating to investments in Latin America. This impairment was due to a conservative criterion and not based on any economic or fair value of the Latin America reporting units and therefore an impairment under both Spanish and U.S. GAAP did not apply. Since the impairment did not comply with Spanish GAAP the auditor disclosed a qualification in their local auditors’ report. However under U.S. GAAP this impairment was reversed. This adjustment reflects the register of goodwill that under U.S. GAAP should not be impaired in prior years.
Reversal of amortization under Spanish GAAP
As it is required in SFAS 142, it is necessary to reverse the amortization recorded under Spanish GAAP (€342,081 thousand in 2004, €411,077 thousand in 2003 and €559,400 thousand in 2002). In 2002 the amortization of Goodwill related to some reporting units was considered impaired based on the test basis performed and therefore it was not reversed amounting to €154,074 thousand.
Exchanges differences
For Spanish GAAP purposes the goodwill arising on acquisitions, when the parent company is the direct acquirer of companies abroad, is translated to euros at the exchange rates prevailing at the time the goodwill arises. For U.S. GAAP purposes the goodwill is considered as a foreign currency asset and is translated at the year-end exchange rate.
As of January 2003, the Bank announced its strategic agreement with Bradesco to sell BBV Brasil, S.A. Since BBVA meet the requirement of SFAS 144 for BBV Brasil, S.A. to be reported as an asset held-for-sale and classified as a discontinued operation as of December 31, 2002, BBVA recorded this investment in BBV Brasil, S.A., including the accumulated foreign currency translation adjustment at the lower of cost or fair value, less costs to sale. The estimated fair value, less costs to sale, for BBV Brasil, S.A., was determined based on the announced agreement with Bradesco to sell BBV Brasil, S.A. As a result, under U.S. GAAP, an adjustment to cancel, the remaining goodwill and the accumulated negative exchange differences related to this goodwill was charged to income. In 2002, these effects supposed a decrease in net income of €137,812 thousand.
A discounted cash flow model was selected as the main method to determine the fair value of its Reporting Units, although other methodologies such as using quoted market values and market multiples were also used. Cash flow estimates require judgment and the Bank believes that assumptions used in determining the cash flows are consistent with assumptions marketplace participants would use in their estimates of their fair value.
The BBVA Group’s goodwill assigned to each Reporting Unit as of December 31, 2004 for annual impairment test purposes are the following:
Pensions in America
The definition of the Reporting Units is more specific in relation with the Business activities mainly as a result of the different regulations in Latin America for the banking sector in Banking in America and Asset Management and Private Banking (where the Pensions in America are disclosed).
Expected cash flows have been calculated using the “maximum payable dividend” for each period, considering net income and excess of minimum capital required. For financial statements and macroeconomics scenarios, a five year horizon was used to determine fair value. The risk free rate, the market risk premium and the country risk premium (when applicable) were considered to determine the discount rate used for each Reporting Unit.
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Year 2004, 2003 and 2002 analysis
As of December 31, 2004, 2003 and 2002, the Bank has performed the required annual impairment tests of goodwill. As a result of Step 1 procedures of the abovementioned impairment test, the carrying amount of the Reporting Unit did not exceed its fair value.
The argentinean goodwill originated in 2002 was written-off against income. Management decision was taken considering that there were no clear future benefits associated with it.
Step Acquisition of BBVA Bancomer
As it is explained in note 4, on March 20, 2004, BBVA completed the tender offer on 40.6% of the capital stock of Grupo Financiero BBVA Bancomer, S.A. de C.V. (“Bancomer”). The final number of shares presented in the offer and accepted by BBVA was 3,660,295,210, which represent 39.45% of the capital stock of Bancomer. Following the acquisition of these shares through the tender offer, the ownership interest held by BBVA in the capital of Bancomer was 98.88%. Lastly, as of December 31, 2004, as a result of the purchase of shares subsisting in the market, BBVA’s holding in Bancomer increased to 99.70%.
BBVA Bancomer, S.A. de C.V. was consolidated by Group BBVA since July 2000, when the merger of Grupo Financiero BBV-Probursa, S.A. de C.V. (a wholly-owned subsidiary of BBVA) and Grupo Financiero BBVA Bancomer, S.A. de C.V. was carried out.
Since March 20, 2004 the BBVA Group´s income statement reflected a decrease in Minority Interest caption due to the business combination described above while the rest of income statement´s captions did not changed because Bancomer already was a fully consolidated company before the business combination.
The cash paid for the acquired entity was €3,324 million. In connection with this business combination there are no contingent payments, options, or commitments specified in the acquisition agreement.
Under Spanish GAAP the increase in goodwill in 2004 was €2,116.7 million (see note 13), because no amounts were allocated to assets or liabilities of the company acquired. Under U.S. GAAP once the process of allocating the acquisition price to all assets and liabilities of the company acquired, the goodwill amounted to €1,060.2 million. The whole amount of goodwill is allocated to the Mexico reporting unit in the Banking in America segment (see note 32.2.B.5).
The conciliation of the net worth acquired under Spanish GAAP and the fair value of the assets and liabilities acquired for purposes of U.S. GAAP was as follows:
Net worth acquired considered under Spanish GAAP
Investment securities
Net loans and leases
Premises and equipment
Intangible assets
Other Assets
Time Deposits
Long term debt
Fair value under U.S. GAAP
The identified intangible assets are related to ‘core deposits’, that were calculated according to the purchase method and are amortized in a period of 40 months. Additionally, the allocated amount of net loans and leases are amortized in a weighted-average period of 3 years. The adjustment in the reconciliation to U.S. GAAP includes €273,287 thousand in 2004 due to the additional amortization expenses of assets and liabilities subject to amortization.
The “Other liabilities” caption includes basically temporary differences arising form different accounting and tax values of assets and liabilities allocated in the acquisition. Because the amounts allocated to certain assets are non deductible under Spanish Tax Law, additional goodwill and the corresponding deferred tax liabilities have been considered under U.S. GAAP.
The following unaudited proforma information presents a summary of the effect in the BBVA Group´s consolidated results of operations as if the acquisitions described above had occurred on January 1, 2004 and 2003.
Year ended
December 31,2004
December 31,2003
Revenues
Net Income
Basic EPS (Euros)
These unaudited proforma results have been prepared for comparative purposes only. They do not purport to be indicative of the results of operations that actually would have resulted had these operations occurred at January 1, 2004 and 2003, or future results of operations of the company acquired.
Since Bancomer was consolidated by Group BBVA since July 1, 2000, there are not purchased research and development assets acquired and written off.
There are not series of individually immaterial business combinations completed during the period and material in the aggregate.
There are not extraordinary gains related to the business combination described above.
6. Result on transactions with parent company shares-
Following Circular 4/1991, result of sale transactions with Bank shares owned by subsidiaries must be accounted for as extraordinary profit or losses (Note 3-i). These shares are reflected at cost, net, where appropriate, of the allowance
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recorded with a charge to retained earnings to write them down to the lower of consolidated underlying book value or market price.
Under U.S. GAAP, the result on transactions with parent company shares must be accounted for in retained earnings. These shares are reflected at cost, netting stockholders´ equity.
7. Loans adjustments
Allowance for loan losses-
Bank of Spain regulation requires an allowance destined to cover probable losses on intra-group transactions subject to country-risk, which is not necessary under U.S. GAAP. This effect suppose a decrease in net income amounted to €137,072 thousand in 2004, an increase amounted to €68,607 thousand in 2003 and a decrease amounted to €4,960 thousand in 2002.
Additionally, as indicated in Note 3-c, Bank of Spain Circular 9/1999 made compulsory to record a provision for the statistical coverage of loan losses to supplement, as required, the specific loans provisions. Under U.S. GAAP, this provision should not be recorded. This effect suppose an increase in net income amounted to €469,068 thousand, €319,372 thousand and €226,576 thousand in 2004, 2003 and 2002, respectively.
Loan origination fees.
Under Spanish GAAP, loans origination fees are recorded when collected and charges direct origination costs when incurred. In accordance with U.S. GAAP under SFAS Nº 91, loan origination fees and certain direct loan origination costs should be recognized over the life of the related loan as an adjustment of yield.
The effects of adjustments required to state such amounts in accordance with U.S. GAAP suppose in 2004 a decrease in net income and stockholders’ equity amounted to €72,450 thousand.
In 2003 and 2002, those effects were not significant in net income and stockholders’ equity.
8. Loans to purchase Banco Bilbao Vizcaya Argentaria, S.A. shares-
As described in Note 8, certain Group banks granted loans to employees and customers for the Banco Bilbao Vizcaya Argentaria, S.A. shares. Under Spanish GAAP, these loans were recorded in the consolidated financial statements under the caption “Loans and Leases”. Under U.S. GAAP, these loans should be recorded as a reduction of stockholders’ equity.
9. Valuation of investment securities available for sale portfolio-
Group’s criteria of accounting for such securities, following Bank of Spain Circular, is described in Notes 3-d and 3-e. Under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, available-for-sale securities (as defined) must be recorded at market value, with changes in value recognized directly in Other Comprehensive Income (See Note 32.2.A-Investment Securities).
In the following paragraphs, the main differences between Spanish GAAP and U.S. GAAP concerning the accounting for debt and equity securities are described:
Under Spanish GAAP debt securities are categorized under three types of portfolios; this classification is similar to the SFAS 115 classification, however, the accounting treatment differs in some aspects between Spanish GAAP and U.S. GAAP.
1) Trading portfolio: under Spanish GAAP, this category includes the listed securities held for the purpose of obtaining gains in the short-term, taking advantage of market price fluctuations. These investments are accounted for at fair value and the variations on fair values are recorded to income.
This portfolio is similar to the trading portfolio under U.S. GAAP. Therefore, following SFAS 115, there is not any difference with respect to Spanish GAAP. Therefore, no adjustment is needed in the reconciliation from Spanish GAAP to U.S. GAAP.
2) Held-to-maturity portfolio: under Spanish GAAP, this portfolio includes the securities that the management has decided to hold until maturity, since it has the financial capacity to do so. The securities of this portfolio are recorded at their acquisition cost adjusted by the amount resulting from accrual by the interest method of the positive or negative difference between the redemption value and the acquisition cost over the term to maturity of the security (amortized cost). Any adjustment to the acquisition cost is recorded to income under Spanish GAAP.
This portfolio is similar to the held-to-maturity portfolio under U.S. GAAP. Following SFAS 115, there is not any difference with respect to Spanish GAAP. Therefore, no adjustment is needed in the reconciliation from Spanish GAAP to U.S. GAAP.
Under Spanish GAAP if an other-than-temporary loss arises in this portfolio, the impairment would be charged to income. Therefore, the accounting treatment does not differ with respect to U.S. GAAP. Any impairment was charged to income due to “other-than-temporary” losses in this portfolio.
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3) Available-for-sale portfolio: under Spanish GAAP this portfolio includes all other debt securities not classified in either one of the two portfolios described above. Securities classified in this portfolio are individually recorded at the lower of their acquisition cost or their fair value.
Changes in fair value
Db Asset Accrual Account (*)
<Cr> Securities Revaluation
Reserve (**)
(*) These Accrual Accounts are presented in the “Available-for-sale” caption on the Asset side of the Balance Sheet. (**) This allowance is presented offsetting “Available-for-sale” portfolio in Consolidated Balance Sheet. However it is disclosed in a footnote to the financial statements.
These entries under Spanish GAAP do not affect net income or stockholders’ equity. In the future, if the fair value goes up, the allowance is reduced consequently.
Under U.S. GAAP “temporary” losses are recorded to “Other Comprehensive Income (OCI)”. This difference between Spanish GAAP and U.S. GAAP is adjusted in the adjustment 9 in the reconciliation to U.S. GAAP. This adjustments decreases stockholders’ equity in €45,708 thousand and €59,233 thousand in 2004 and 2003, respectively.
Under Spanish GAAP unrealized losses are classified as “other-than-temporary” when management believes that it will not collect or recover all the amounts due (credit risk), or when due to market conditions (volatility, interest rate evolution, macroeconomic variables, etc.) or future expectations, management considers that all or part of unrealized losses will not be recovered (market risk). BBVA performs this analysis at the end of each reporting period.
Under Spanish GAAP there are no general rules regarding the methodologies and factors to be used or the period of time needed to consider impairment as other than temporary. BBVA’s management considers that an impairment is other than temporary if, considering the factors explained in the preceding paragraph, the estimated fair value of the debt securities does not show a demonstrable recovery in the near term future (one year).
According to SAB 59, the value of investments in marketable securities may decline for various reasons. The market price may be affected by general market conditions which reflect prospects for the economy as a whole or by specific information pertaining to an industry or an individual company. According to this literature, such declines require further investigation by management. Acting upon the premise that a write-down may be required, management should consider all available evidence to evaluate the realizable value of its investment. SAB 59 gives the following few examples of the factors which, individually or in combination, indicate that a decline is other than temporary and that a write-down of the carrying value is required:
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a. The length of the time and the extent to which the market value has been less than cost;
b. The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; or
c. The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.
Also according to SAB 59, unless evidence exists to support a realizable value equal to or greater than the carrying value of the investment, a write-down accounted for as a realized loss should be recorded. In accordance with the guidance of paragraph 16 of SFAS 115, such loss should be recognized in the determination of net income of the period in which it occurs. The written down value of the investment in the company becomes the new cost basis of the investment.
BBVA considers that the criteria used for evaluating if an impairment is “other than temporary” under Spanish GAAP is consistent with the U.S. GAAP literature mentioned above and other literature related to this topic, such as SFAS 115 and EITF D –44.
Under U.S. GAAP, unrealized losses in Argentinean debt securities considered in 2003 “other than temporary” amounted to €257,933 thousand. In 2004, the Argentinean debt securities suppose an increase of net income of €176,777 thousand (due basically to sales during the year) and a decrease of stockholders´ equity of €55,445 thousand.
Under Spanish GAAP, equity securities are categorized in different portfolios. This classification is similar to SFAS 115 classification, however, the accounting treatment of some portfolios differs between Spanish GAAP and U.S. GAAP.
This portfolio is consistent with the trading portfolio under U.S. GAAP. Following SFAS 115, there is no difference from Spanish GAAP. Therefore, no adjustment is needed in the reconciliation from Spanish GAAP to U.S. GAAP.
Under U.S. GAAP, for unlisted securities, according to APB 18, while practice varies to some extent, the cost method is generally followed for most investments in noncontrolled companies equity investments. For listed securities SFAS 115 literature applies.
Listed Securities
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Db Market Operations (Income Statement)
Reserve (*)
(*) This allowance is presented offsetting “Available-for-sale” portfolio in Consolidated Balance Sheet. However it is disclosed in a footnote to the financial statements.
The criteria used by BBVA Group for considering an impairment as “other-than-temporary” are describe above.
BBVA considers that the criteria used for evaluating if an impairment is “other than temporary” under Spanish GAAP is consistent with the U.S. GAAP literature mentioned above and other literature related to this topic as SFAS 115 and EITF D –44. No impairment, due to “other-than-tempory” unrealized losses, was registered under Spanish GAAP or U.S. GAAP.
Unlisted Securities
As explained above, BBVA considers that the criteria used for evaluating if an impairment is “other than temporary” under Spanish GAAP is consistent with the U.S. GAAP literature (SAB 59) mentioned above and other literature related to this topic as APB 18 and EITF D –44. All
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unrealized losses in unlisted equity securities were considered as “other-than-temporary” due to the bad performance of the companies and the very limited liquidity of these securities. These unrealized losses amounted to €37,511 thousand and € 7,995 thousand in 2004 and 2003, respectively, and they were charged to income statement.
In addition, in adjustment 9 BBVA Group applies SFAS 115 to all equity investment accounted for by the equity method under Spanish GAAP but under U.S. GAAP must be accounted for at fair value (see Note 32.2.B.3). The application of SFAS 115 to these investments increases stockholders` equity in €2,724,085 thousand and €2,114,035 thousand in 2004 and 2003, respectively, due to the recognition of net unrealized gains in “Other Comprehensive Income”.
10. Intangible assets-
As indicated in Note 3-f, under Spanish GAAP the expenses of capital increases carried out at the Bank and dependent companies are amortized under a period of five years. Under U.S. GAAP these expenses should be recorded as incurred by a charge to reserves. This effect supposes an increase in net income in €29,072 thousand, €22,764 thousand and €21,958 thousand and a decrease in stockholder’s equity in €48,093 thousand, €32,302 thousand and €53,051 thousand in 2004, 2003 and 2002, respectively.
Also, under Spanish GAAP incorporation and start up expenses are amortized over a period of five years and under U.S. GAAP should be charged to income as incurred. This effect supposes an increase in net income in €8,682 thousand, €42,894 thousand and 13,120 thousand in 2004, 2003 and 2002, respectively, and a decrease in stockholder’s equity in €8,068 thousand, €16,750 thousand and €68,319 thousand in 2004, 2003 and 2002, respectively.
Definite lived intangible assets are mainly integrated by software expenses. Definite lived intangible assets are amortized over their remaining useful lives and the Bank considers that there is no impairment associated to these assets.
11. Derivative Instruments and Hedging Activities
11.1. Objectives for the holding of positions in derivatives and strategies for the achievement of these objectives
The holding of positions in derivatives is the result of the Group’s need to manage the risks incurred by it in the course of its normal business activities. Derivatives represent another of the tools available to the Group, and are necessary for the management of:
Market Risk
Managed by the Central Market Risk Unit, market risk is to be found in the Group’s market or treasury activities, which are characterized by the holding of positions sensitive to fluctuations in market prices. The Market Risk Unit, which is organically separate from and independent of the business units, is responsible for adapting and administering risk measurement and control tools and for regularly monitoring that the business units comply with the risk limits and policies. The Unit also periodically reports to the Standing Committee, the Lending Committee, the Management Committee and the Internal Risk Committee on levels of risk, results and the degree of compliance with such limits in the Group, at individual and aggregate level.
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One of the basic pillars of the BBVA Group’s market risk management model is the limit structure, which consists of an overall VaR limit for each business unit, supplemented by a series of specific sublimits by desk, business line, and risk or product type.
Proposals for the overall limits for all the business units and for certain sublimits are approved by the Standing Committee. The business units, together with the Risk Area, are responsible for distributing these limits by desk, business line or risk type. These VaR limits are supplemented by others based on non-statistical measures such as delta sensitivity, nominal exposure or stop-loss on the results of the markets areas. This limit structure is part of the Group’s general control system, which includes the definition of a variety of prior warning signs which trigger the contingency plans to attempt to prevent situations that might adversely affect the Bank’s results.
The purpose of the market risk management and measurement model currently in place at the BBVA Group is to measure both general market risk and specific risks, for which the Group employs the Value-at-Risk (VaR) methodology, which aims to measure the maximum loss that can occur in the value of the portfolio as a result of fluctuations in general conditions on the financial markets, as shown by changes in interest rates, exchange rates and equity security prices, if the portfolio is maintained for a certain period. To these three major risk factors must be added basis risk (which arises, for example, when there are debt positions the interest-rate risk on which is hedged by swap transactions, generating a risk because there is a variable spread between the interest-rate curves relevant for the valuation of these positions) and spread risk (associated with corporate securities or credit derivatives on corporate issuers), together with, in the case of option positions, volatility and convexity risk and, in certain cases, correlation risk, since all the above are risk factors that might influence the market prices of certain products.
The VaR model used is the covariance matrix, with a confidence level of 99% and a time horizon of one day, improved to take into account convexity and other risks associated with option positions and structured derivative products. In addition, periodical supplementary settlement VaR calculations are performed for certain business units, which include adjustments to factor in the specific liquidity of the position, taking into account the liquidity conditions on the financial markets at any time.
The Group has continued to implement its new risk measurement platform which, in addition to the advantage of enabling market risk to be integrated with credit risk, thus facilitating an overall view of existing risk, makes it possible to calculate market risk using the covariance matrix, the historical simulation and the Monte Carlo simulation methodologies.
The market risk measurement model includes a back-testing or ex post contrast program, which to a certain extent guarantees the suitability of the risk measures that are performed. In order to validate the VaR measurement system, comparisons are made, inter alia, of the levels of ex ante risk provided by the model with the ex post results obtained by the units each day.
Stress-testing is an essential supplementary tool for market risk management, especially in the wake of the recent crises in Argentina and Brazil and the upheaval in the financial markets after the events of September 11, 2001. Accordingly, in order to strengthen risk management and control, the BBVA Group periodically calculates the exposure to losses of each business unit in response to events beyond the predetermined confidence interval for the daily measurement of market risk. This enables senior management to ascertain whether the level of exposure to losses under these potential scenarios fits in with the Bank’s appetite for risk, and to design, on the basis of that exposure, the contingency plans that must be implemented immediately if an unusual situation similar to those examined should occur.
Structural Interset-rate risk
The responsibility for controlling and monitoring structural interest-rate risk falls on the Risk Area, which periodically measures this risk from a dual perspective: on the one hand, from the net interest income standpoint and, on the other, from that of the economic value. In the former case, net interest income is projected for the next 12 months; and in the case of the analysis of economic value, a discounted current
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value is calculated of expected future flows in the balance sheet. The impacts of fluctuations in interest rates on both measures are calculated by using both parallel displacements in interest-rate curves and shocks that take into account changes of slope and curvature. Several interest-rate curve simulation methodologies have been developed to determine these changes of slope and curvature and these methodologies are used to calculate expected losses in net interest income and in economic value, with a confidence level of 99%.
Structural Exchange-Rate Risk
The Risk Area periodically measures structural exchange-rate risk using a statistical simulation model that includes certain exchange-rate crisis scenarios to which certain estimated probabilities of occurrence are assigned. Another factor in the model is the projection at one year of the exchange rates of the currencies involved. Every month the total risk is calculated in annual VaR terms with a confidence interval of 99%.
11.1.2. Transactions whose risks are hedged for U.S. GAAP purposes
11.1.3. Purpose of the use of macrohedges:
Macrohedges are used to facilitate the overall management of the risk to which the Bank is exposed in managing correlated assets, liabilities and other transactions. As of December 31, 2004, the Group had arranged two macrohedges:
Equity Securities
A global equity securities macrohedge designed to encompass the price risk positions of BBVA’s Investment Banking Area. This Area conducts its price risk management operations through the following two business units:
This subunit is responsible for managing the products that arise in relation to trading room customers and which in one way or another are affected by equity volatility.
This Unit is divided into the following subunits:
This subunit is responsible for exploiting the balance (spot positions assumed at the desk) for the benefit of the results thereof.
The businesses of this area are as follows:
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The purpose of equity securities macrohedges is to reduce the risk of equity options arranged with third parties and managed by the volatility subunit.
These options, together with the transactions arranged on organized futures and options markets and other transactions on deep, liquid markets, constitute a single aggregate for risk management purposes.
Macrohedge of Euro deposits
This macrohedge includes the operations deriving from the management of the interest-rate risk resulting from the taking by the Bank of long-term (over 12 months) fixed-rate deposits.
This activity exposes the Bank to a long-term interest-rate risk which is managed using correlation through various types of products: basically IRS, futures and bonds, in addition to swaptions in those cases in which it is necessary to hedge existing options on the deposits.
The significant risks relating to these operations are as follows:
Market risks:
Based on the description of the macrohedge set forth above, the macrohedge will include the following products:
These macrohedges maintained by BBVA Group, under Spanish GAAP, do not qualify as hedges under U.S. GAAP.
11.2. Accounting for Derivative Instruments and Hedging Activities
Under U.S. GAAP the Group adopted, effective January 1, 2001, SFAS No.133 (“SFAS 133”), Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (embedded derivatives) and for hedging activities. This Statement requires that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value.
Under SFAS 133 the accounting for changes in fair value of a derivative instrument depends on its intended use and the resulting designation.
If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item attributable to the hedged risk are recognized in earnings.
If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in Other Comprehensive Income and are recognized in the income statement when the
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hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.
The gain or loss on a hedging derivative instrument that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation is reported in the same way as a translation adjustment to the extent it is effective as a hedge. The ineffective portion of net investment hedges is reported in earnings.
Hedging transactions must be formally documented, designated and the company must describe the way the effectiveness is going to be assessed.
On the other hand when the derivative is designated as a trading transaction the changes in the fair value must be recognized currently in earnings.
11.3. Impact of SFAS 133
Identification of accounting differences:
Regarding derivatives and hedge accounting, the differences between Spanish GAAP and U.S. GAAP are mainly the following:
Hedges
Spanish GAAP hedging requirements:
Bank of Spain regulations on derivatives and hedge accounting refers to the same topics as U.S. GAAP. As in U.S. GAAP, this regulations address the documentation, measurement, control and accounting matters. Both Spanish and U.S. GAAP deal with the same concepts (e.g., the offsetting effect of hedges and their effectiveness), although using different wording and terminology.
The Bank of Spain regulations consider hedging transactions those that meet the following criteria:
a) Transactions aimed at eliminating or significantly reducing the foreign exchange rate risk, the interest rate risk or price risk of balance sheet items or other items provided that, in each case, the hedged item and the hedging transactions are explicitly identified at inception of the hedge.
b) Transactions aimed at reducing the global risk of correlated groups of assets, liabilities and other transactions, if they are managed through an integrated risk measurement and management control system that allow for the follow-up and explicit identification of the transactions. This system requires a favorable opinion of the external auditor to be issued and reported to the Bank of Spain on an annual basis. Such report specifically addresses the reasonableness, quality, and consistency of the integrated risk measurement and management control system (including compliance with specific documentation requirements) as well as the effectiveness of macro-hedges (80%—120% range) through the performance of independent stress tests of all macro-hedges in place.
In the hedges that meet criteria a), gains or losses of the derivatives are accrued and/or recognized symmetrically to the revenues or expenses arising from the hedged items. This means that whatever impact the hedged item has on net income is offset by the impact recorded in the same line item in the statement of operations under Spanish GAAP for the hedge instrument.
In the hedges that meet criteria a) and b) (“macro-hedges”), all the transactions involved are either accrued or marked to market, net losses are always recorded in the statement of income. For certain types of macro-hedges, net gains would be recorded in statement of income. The income statement treatment for all macro-hedges is determined and documented at the inception of the hedging transaction.
The Group enters into thousands of derivative transactions, most of which are aimed at eliminating or reducing risks, but only a limited amount of these transactions receive hedge accounting treatment under Spanish GAAP due to the strict qualifying requirements of Bank of Spain regulations. Given that U.S. GAAP does not allow certain types of hedges, derivative transactions accounted for as hedges under U.S. GAAP are only a portion of the hedge transactions under Spanish GAAP.
Each type of derivatives accounted for as a hedge under Spanish GAAP is related to a specific type of hedge as classified under U.S. GAAP (fair value or net investment) as follows:
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Spanish GAAP classification
U.S. GAAP classification
Hedges on available-for-sale fixed rate debt securities
Hedges on held-to-maturity securities
Hedges on long term fixed rate debt issued
Hedges of the foreign currency of a net investment in a foreign subsidiary
Hedged on Available for sale equity securities (non-group investments)
Hedges on fixed rate loans
Macro-hedge
Hedges on floating rate loans in foreign currencies
Fair value hedge
Trading
Hedges of the foreign currency of a net investment in a foreign operation
Fair Value hedge
Cash Flow Hedges
In order to conform to U.S. GAAP the Group considers certain derivatives as hedging transactions. These hedges are formally documented, are expected to be effective, and the Group designates and assesses periodically the effectiveness of such hedges. The Group considers these operations as qualified hedges under SFAS 133. The Group has qualified these hedges as fair value hedges and as cash flow hedges, and their gains or losses should have been recognized in earnings or in Other Comprehensive Income (OCI) in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged, depending on whether the hedging relationship satisfies the criteria for a fair value or Cash flow hedge, respectively. As there is no significant hedge ineffectiveness to be considered, due to the effectiveness of such hedges, no adjustment was made in the reconciliation of net income and shareholders’ equity to U.S. GAAP.
For all other transactions recognized as Hedging Derivatives under Spanish GAAP that do not meet the requirements of hedge accounting under SFAS 133, the gain or loss on the derivative instrument has been recognized through earnings in the reconciliation to U.S. GAAP as hedge accounting has not been applied under U.S. GAAP.
The Group uses these instruments to hedge global equity and interest rate risk exposures. These transactions are permanently subject to an integrated, conservative and consistent system of risk management (e.g. estimate value at risk -VaR- of the transactions to check the equity risk is reduced due to the use of derivatives…) that measures, controls and manages the risks and the results of the operations involved.
The bank records provisions to cover future losses (generic provisions) based on VaR calculations.
The Bank has two different kinds of macro-hedges:
Share price risk macro hedge
The objective of this kind of macro hedge is to globally hedge the equity risk exposure arising from a trading portfolio, through trading equity derivatives.
The Group marks all the derivatives and the hedged assets (trading portfolio) to market, recording gains or losses into the income statement. Additionally, generic provisions are recorded to cover up future losses. Under Spanish GAAP, all the derivatives and the hedged assets are marked to market and the gain or losses are recorded in the income statement.
This macro hedge does not qualify as a hedge under U.S. GAAP, thus no adjustment is needed to recognize the fair value of the derivatives because under Spanish GAAP the derivatives are marketed to market with changes in market value reflected in the income statement.
The only adjustment in the reconciliation to U.S. GAAP consists in eliminating the generic provisions. As of December 31, 2004 and 2003 the elimination of this provision gave rise to an increase of €2,543 thousand and of €1,226 thousand, respectively, in net income which is include in the effect of adoption of SFAS 133 describe later on.
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Interest rate risk macro hedge
The objective of this kind of macro hedge is to globally hedge the interest risk of a portfolio of deposits due to customers.
The Group considers the fair value all the derivatives and the hedged deposits. The net losses are recorded in the income statement, while the net unrealized gains are not recorded into the income statement.
Under U.S. GAAP, this macro hedge cannot qualify as a hedge. The adjustment in the reconciliation to U.S. GAAP consists of:
As of December 31, 2004 and 2003 the recognition of the fair value of Interest Risk macrohedge and the elimination of the generic provisions gave rise to an increase of €184,411 thousand and €113,353 thousand, respectively, and €273 thousand and €457 thousand in net income, respectively. This adjustment is included in the effect of adoption of SFAS 133 describe later on.
Foreign Currency Hedges
The Group considers certain derivatives as hedging the foreign currency exposure of a net investment in a foreign subsidiary. The derivatives are traded in the same currency of the country in which the foreign subsidiary is located.
Under Spanish GAAP, these gains or losses are recorded with a charge in OCI to offset the differences arising in the translation of the subsidiary financial statements. These operations are qualified as a hedge of the foreign currency exposure of a net investment in a foreign operation under U.S. GAAP. As a consequence, there is no reconciliation adjustment for this operation.
Trading derivatives
Under Spanish GAAP, trading transactions are valued, depending on the market on which they are traded, as follows:
Under U.S. GAAP, the gain or loss on a derivative instrument not designated as a hedging instrument shall be recognized through earnings.
All derivatives recognized as trading transactions under Spanish GAAP are also considered as trading for U.S. GAAP purposes.
The adjustment in the U.S. GAAP reconciliation consists of recognizing the unrealized gains not recognized for Spanish GAAP as described in the preceding paragraphs.
Other derivatives
All material intercompany accounts and transactions between the consolidated companies are eliminated in consolidation. This consolidation principle also applies with respect to intercompany derivative transactions.
As of December 31, 2004, the application of SFAS 133 gave rise to a decrease of €41,725 thousand in net income and an increase of €44,107 thousand in Other Comprehensive Income. As of December 31, 2003, the application of this method gave rise to a increase of €207,460 thousand in net income and an increase of €58,359 thousand in Other Comprehensive Income. As of December 31, 2002, the application of this method gave rise to a decrease of €126,660 thousand in net income and an increase of €72,039 thousand in Other Comprehensive Income.
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The effect in Other Comprehensive Income is produced basically by valuating the derivative instruments hedging the available-for-sale portfolio, that under Spanish GAAP are considered hedged items, and therefore are not marked to market, but under U.S. GAAP are not qualified as a hedge.
As of December 31, 2004 the Group have enter into derivatives which hedge the variability of cash flows related to floating rate loans in foreign currencies. In 2003 and 2002 the Group, under U.S. GAAP, did not have any amounts for cash flow hedges. As of December 31, 2004 the valuation of derivatives related with Cash Flow Hedges amounts gave a rise of €33,346 thousand in Other Comprehensive Income. As of December 31, 2004 the total amount of €4,886 thousand is expected to be reclassified as losses during the next twelve months. The maximum time over which BBVA Group is hedging exposure to variability of cash flow is 2008. For the year ended December 31, 2004 there were not any material ineffective portions for this hedging transaction.
11.4. Additional disclosures required by U.S. GAAP: Fair Value Methods
The methods used by the Group in estimating the fair value of its derivative instruments are as follows:
Forward purchases/sales of foreign currency
Estimated fair value of these financial instruments is based on quoted market prices.
Forward purchases/sales of government debt securities
Estimated fair value of these financial instruments is based on quoted market prices, since they are mostly traded in organized markets.
Options and financial futures
Derivatives traded in organized markets are valued based on quoted market prices.
For options and futures traded in OTC markets, the fair value is estimated based on theoretical year-end closing prices. These year-end closing prices are calculated according to generally accepted models estimating the amounts the Group would receive or pay based upon the yield curve/ volatilities prevailing at year-end or prices.
Forward rate agreements and interest rate swaps
Fair values of these contracts are estimated based on the discounted future cash flows related to the interest rates to be collected or paid, using for this purpose the yield curve prevailing at year-end.
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The disclosure of the notional principal amounts of the derivatives of the Group by trading or hedging, under U.S. GAAP, operations is as follows:
Interest risk contracts:
Foreign exchange contracts:
Forward purchase/sale of foreign currency
Derivatives on securities and commodities
Hedging derivatives
Total trading and hedging derivatives
The following is a detail of the trading transactions notional amount and their year-end fair value for year 2004, 2003 and 2002 disclosed in each type of instrument.
Notional
Amount
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The reconciliation between the disclosures presented above (under U.S. GAAP) and the disclosures presented in Note 26 (under Spanish GAAP) as of December 31, 2004 is as follows:
The notional amount and the fair value of derivatives that afforded hedge accounting treatment under Spanish GAAP but did not qualify as hedges under U.S. GAAP as of December, 31 2004 are disclosed in the following table:
Hedging derivatives under
Spanish Gaap not under U.S. Gaap
The notional amount and the fair value of derivatives that afforded hedge accounting treatment under Spanish GAAP and qualify as hedges under U.S. GAAP as of December, 31 2004 are disclosed in the following table:
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The reconciliation of the items of Income Statement affected by derivative and hedging accounting between Spanish GAAP and U.S. GAAP is as follows:
U.S.
GAAP
Interest Income
Interest Expenses
Net Interest Income
Gain/losses from foreign Exchange, derivatives and others
The columns adjustments includes:
12. Translation of financial statements in high-inflation countries-
As indicated in Note 3-b, certain of the dependent companies record charges in the statement of income to protect their net worth from the theoretical depreciation arising from inflation.
According to Bank of Spain regulation, inflation accounting adjustments accounted for by subsidiaries under GAAP in their countries can be recorded at consolidated financial statements of the Group. These inflation accounting adjustments are not accepted under U.S. GAAP.
Under U.S. GAAP, the financial statements of operating units in a highly inflationary economy are remeasured as if the functional currency of the operating unit were the same as that of the parent reporting currency. For the purposes of this requirement, a highly inflationary economy is one that has cumulative inflation of approximately 100 percent or more over a 3-year period. None of the countries were BBVA owns subsidiaries are highly inflationary countries.
The adjustment reflects the reversal of the theoretical depreciation arising from inflation registered in dependent companies established in “non highly inflationary economies”.
13. Tax effect of U.S. GAAP adjustments and deferred taxation under SFAS No. 109-
The previous adjustments to net income and stockholders’ equity do not include their related effects on corporate tax (except for the adjustments mentioned in Item 1 and the acquisition of BBVA Bancomer, S.A. de C.V. described in Item 5), which are disclosed under “Tax effect of above mentioned adjustments” item on the reconciliation statements.
As described in Note 3-l under Spanish GAAP only the timing differences which have a specific reversal period of less than ten years have been recorded. As a result of the application of Statement of Financial Accounting Standards No. 109 (“SFAS 109”), Accounting for Income Taxes, the timing differences originated by the provision for the statistical coverage of loan losses (note 32.2.B.7) and by the allowance assigned to cover probable losses on intra-group transactions subject to country-risk (note 32.2.B.7) have been reversed.
In the reconciliation to U.S. GAAP, the Group has recorded as of December 31, 2004, deferred tax assets of €195,636 thousand (€93,864 thousand and €226,749 thousand as of December 31, 2003 and 2002, respectively) and deferred tax liabilities of €1,569,621 thousand (€895,537 thousand and €431,862 thousand as of December 31, 2003 and 2002, respectively). As of December 31, 2004 deferred tax liabilities arise mainly from valuation of investment securities adjustments (see note 32.2.B.9), adjustments mentioned in Item 1 and the allocation of assets in the acquisition of BBVA Bancomer, S.A. de C.V. described in Item 5, in Spanish GAAP to U.S. GAAP reconciliation.
Under U.S. GAAP, as of December 31, 2004, a deferred tax asset amounting €885,411 thousand (€614,249 thousand and €53,242 thousand as of December 31, 2003 and 2002, respectively) had been recognized.
SFAS 109 requires providing a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. As of December 31, 2004, 2003 and 2002 the valuation allowance amounted to €837,098 thousand, €672,218 thousand and €113,210 thousand, respectively.
The following is a reconciliation of the income tax provision under Spanish GAAP to that under U.S.GAAP:
Income tax provision under Spanish GAAP
Tax effect of U.S. GAAP adjustments and deferred taxation under SFAS 109
Income tax provision under U.S. GAAP
Following is a reconciliation of the deferred tax assets and liabilities recorded under Spanish GAAP and those that should be recorded under SFAS 109.
As reported under Spanish GAAP
Timing differences recorded under Spanish GAAP and reversed in the reconciliation to U.S. GAAP
Plus-
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Tax effect of Spanish to U.S. GAAP reconciliation adjustments
Timing differences not recorded under Spanish GAAP and recognized under U.S. GAAP
As reported under SFAS 109 (gross)
Valuation reserve
As reported under SFAS 109 (net)
Following is an analysis of deferred tax assets and liabilities as of December 31, 2004, 2003 and 2002 estimated in accordance with U.S. GAAP:
Deferred Tax assets
Loan loss reserves
Unrealized losses on securities pension liability
Fixed assets
Net operating loss carryforward
Investments and derivatives
Allocated liabilities
Total deferred tax assets
Net tax asset
Deferred tax liabilities
Unrealized gains on investments
Gains on sales of investments
Allocated assets
Total deferred tax liabilities
Net deferred tax assets (liabilities)
A reconciliation between the federal statutory tax rate and the effective income tax rate follows:
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Decrease arising from permanent differences
Adjustments to the provision for prior years’ corporate income tax and others taxes
14. BBV Brasil transaction.
On January 13, 2003, BBVA reached a strategic agreement with Banco Bradesco, S.A., whereby BBVA sold its Brazilian affiliate, BBV Brasil, S.A., to Banco Bradesco, S.A. in exchange for a stake in the latter’s share capital.
The main points of the strategic agreement were as follows:
At measurement date -end of 2002-, the Group, under Spanish GAAP accounted for the expected net losses from the proposed sale, debited the “Losses on disposal of holdings in entities consolidated by global and proportional integration” caption of the consolidated statement of income with the amount of 246 million euros, and credited the same amount to the caption “Losses at consolidated companies arising from negative exchange differences in consolidation” in order to cancel, pursuant to Bank of Spain regulations, the cumulative exchange losses, recorded against consolidation reserves, derived from the conversion of the financial statements of BBV Brasil since its
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takeover; this accounting transaction had no effect on the Group’s net worth. The Group had also recorded €92 millions of capital gains, which have been credited to the said caption of the consolidated statement of income and charged to the “Other Assets” caption of the consolidated balance sheet. Lastly, a Specific Fund of €35 millions had been allocated under the “Extraordinary Losses” caption of the statement of income to match the theoretical goodwill that arised as a result of the aforementioned registration of the shares of Banco Bradesco, S.A.
As of December 31, 2002, under U.S. GAAP, the remaining goodwill and the accumulated negative exchange differences related to this goodwill must be cancelled, by a charge to income. These effects supposed a decrease in net income of €137,812 thousand in 2002. This goodwill was amortized in prior years under Spanish GAAP.
Additionally, under U.S. GAAP the transaction should be measured at fair value. This adjustment gave rise to an increase in net income and stockholders´ equity of €4,251 thousand in 2002.
Under U.S. GAAP, capital gains as of December 31, 2002 amount to:
Total gains under Spanish GAAP
Amortization Goodwill under U.S. GAAP
Measure transactions at fair values
Other adjustment in reconciliation to U.S. GAAP
Total losses under U.S. GAAP
The carrying amounts of the mayor classes of assets and liabilities of Group BBVA without Brazil and Group BBV Brazil is disclosed as follows:
BBVA (*)
BBVAwithout
BBV
Brasil
INTANGIBLE ASSETS:
CONSOLIDATION GOODWILL:
PROPERTY AND EQUIPMENT:
ACCUMULATED LOSSES AT CONSOLIDATED COMPANIES
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DUE TO CREDIT INSTITUTIONS:
DEPOSITS:
MARKETABLE DEBT SECURITIES:
PROVISIONS FOR CONTINGENCIES AND EXPENSES :
NEGATIVE CONSOLIDATION DIFFERENCE
MINORITY INTERESTS
RESERVES AT CONSOLIDATED COMPANIES
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The contribution of BBV Brazil to the Group’s consolidated statement of income based on Spanish GAAP during 2002 and 2001 is as follow:
(Thousands of Euros)
BBVA
NET FEES
BASIC MARGIN
ORDINARY REVENUE
OTHER OPERATING EXPENSES (NET)
NET INCOME FROM COMPANIES ACCOUNTED
FOR BY THE EQUITY METHOD
Share in results of companies accounted for by the equity method
AMORTIZATION OF CONSOLIDATION GOODWILL
NET INCOME ON GROUP TRANSACTIONS
EXTRAORDINARY NET LOSSES
BBV Brasil Net income has included adjustments of Consolidation.
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Operating results under Spanish GAAP of discontinued operations associated with BBV Brasil were as follows:
Income (loss) from continuing operations before federal and foreign taxes
Provision (benefit) for federal and foreign taxes
Income (loss) from continuing operations
Discontinued operations:
Income (loss) from operations of discontinued BBV Brasil, S.A. (including federal and foreign taxes charges of €14,821 thousand in 2002)
Loss on disposal of BBV Brasil, S.A. (including federal and foreign tax charges of €32,200 thousand)
Income (loss) from discontinued operations
Net income (loss)
The losses on disposal under U.S. GAAP of discontinued operations associated with BBV Brasil were €6,877 thousand.
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15. Other Comprehensive Income
SFAS No. 130, Reporting comprehensive income establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
The accumulated balances of other comprehensive income for the years ended December 31, 2004, 2003 and 2002, were as follows:
Balance as of December 31, 2001
Changes in 2002
Balance as of December 31, 2002
Changes in 2003
Balance as of December 31, 2003
Changes in 2004
Balance as of December 31, 2004
Taxes allocated to each component of other comprehensive income in 2004, 2003 and 2002 were as follows:
Foreign currency translations adjustment
Total holding gains arising during the period
Less: reclassification adjustment for gains included in net income
Net unrealized gains
Derivatives Instruments and Hedging Activities
Other comprehensive income
16. Earnings per share
SFAS No. 128, Earnings per Share, specifies the computation, presentation and disclosure requirements for earnings per share (EPS).
Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator), which may include contingently issuable shares where all necessary conditions for issuance have been satisfied. Diluted earnings per share includes the determinants of basic earnings per share and, in addition, gives effect to dilutive potential common shares that were outstanding during the period.
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The computation of basis and diluted earnings per share for the years ended December 31, 2004, 2003 and 2002 is presented in the following table:
Spanish GAAP
Consolidated net income for the year
Preferred stock dividends
Net income attributed to minority interest
Convertible bond interest
Numerator for basic earnings per share
Income available to common stockholders (Spanish GAAP)
Continued operations
Discontinued operations (Note 32.2.B.14)
Income available to common stockholders (U.S. GAAP)
Numerator for diluted earnings per share
Discontinued operations (Note 32.2.B14)
Denominator for basic earnings per share
Denominator for diluted earnings per share
Basic earnings per share (Euros)
Diluted earnings per share (Euros)
17. FIN 45
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). This interpretation requires certain disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements for periods ending after December 15, 2002.
Note 26 to the financial statements contains disclosures about our contingent liabilities and commitments. According to Spanish GAAP, these amounts are recorded in off balance sheet memorandum accounts. Memorandum
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accounts under Spanish GAAP are not included in the balance sheet and basically consist of disclosures of maximum potential amounts.
According to Bank of Spain regulations, all outstanding contingent liabilities and commitments that might in the future affect the net worth of the Bank should be recorded in memorandum accounts. These amounts represent the maximum principal which the Bank may be required to disburse and the maximum potential exposure if all such obligations were ultimately to become worthless. These include, principally, commercial and stand-by letters of credit, bankers acceptances, loan commitments and guarantees.
Under Spanish GAAP, if any fees are received at the inception of these guarantees, the total amounts are recorded in the caption “Other Liabilities” and are amortized and recognized into income over the lives of the contracts. Such treatment is consistent with what is required under FIN 45 (par. 9.a.).
In addition, under Spanish GAAP, obligations reflected in memorandum accounts which fall within the scope of FIN 45 are evaluated in terms of credit and country risks, following criteria analogous to those described in Note 32.2.B.7 “Impairment – allowance for loan losses”, which substantially meet SFAS 5 provisions, and a liability is recorded accordingly.
When a guarantee is issued by the Bank as part of a transaction with multiple elements with an unrelated party (i.e. embedded in other contracts), the fair value of such guarantee is recorded as a liability at the inception. The fair value is estimated using the net present value of expected future payments.
Based on the discussions above, accounting criteria under Spanish GAAP for treatment of contingent liabilities do not differ significantly from that required by FIN 45 under U.S. GAAP. Therefore, we believe that the adoption of FIN 45 does not have a material impact on the Bank’s financial position or results of operations.
18. Other Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities—an interpretation of ARB No. 51 (FIN 46). In December 2003, the FASB issued Interpretation No 46-R Consolidation of Variable Interest Entities. FIN 46 and FIN 46-R clarify the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 and FIN 46–R explain how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. It requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. It also requires certain disclosures by the primary beneficiary of a variable interest entity and by an enterprise that holds significant variable interests in a variable interest entity where the enterprise is not the primary beneficiary.
The mandatory effective dates of FIN 46-R for enterprises with variable interests in variable interest entities created before February 1, 2003, given certain year-end and frequency of reporting assumptions, are basically for periods beginning January 1, 2004 for SPEs and for periods ending December 31, 2004 provided that no interim financial statements reconciled to U.S. GAAP are being filed semi-annually. However, FIN 46-R must be applied to variable interest entities created after February 1, 2003 in the consolidated Financial Statements as of December 31, 2003.
BBVA Group created a variable interest entity, BBVA Capital Finance, S.A.U. in November 2003. Additionally, BBVA Capital Finance, S.A. issued €1,975,000 thousand of preferred stock (see Note 22) during 2004 and 2003. Following the effective rules of FIN 46-R, BBVA applied FIN 46-R to BBVA Capital Finance, S.A.U. As required by FIN-46-R, BBVA does not consolidate Capital Finance, S.A.U because Banco Bilbao Vizcaya Argentaria, S.A. is not the primary beneficiary.
Therefore, €1,975,000 thousand (€350,000 thousand as of December 31, 2003) of preferred stock issued by BBVA Capital Finance, S.A.U. in December 2004 have been reclassified from “Minority Interest” caption in the Primary Financial Statements (see Note 22) to “Time Deposits” caption in the Consolidated Balance Sheet under U.S. GAAP disclosed in note 32.2.C.2. Additionally, €17,614 thousand (€288 thousand as of December 31, 2003) of dividends of preferred stock have been reclassified from “Minority Interest” caption in the Primary Financial Statements (see Note 22) to “Time Deposits” caption in the Consolidated Balance Sheet under U.S. GAAP disclosed in note 32.2.C.2.
The adoption of FIN 46 has had no significant impact on 2003 and 2004 net attributable income or stockholders’ equity. The preference shares issuance vehicles activity is designed to make a profit enough to pay the preference
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shares fixed dividend and pay the related expenses, there is no other profit. As a result, the net income of the preference shares issuance vehicles deconsolidated is attributable to the holders of preference shares and there is no effect on stockholders’ net income.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Specifically, this Statement requires an issuer to classify the following instruments as liabilities (or assets in some circumstances): (1) a financial instrument issued in the form of shares that is mandatorily redeemable, (2) a financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and that requires or may require the issuer to settle the obligation by transferring assets, (3) a financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares, if, at inception, the monetary value of the obligation is based solely or predominantly on certain specified criteria.
SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Statement is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before its issuance date and still existing at the beginning of the interim period of adoption. Restatement is not permitted.
FASB Staff Position 150-3 “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150”. FSP 150-3 defers the effective date of Statement 150 for certain mandatorily redeemable noncontrolling interests (of all entities, public and nonpublic) that would not have to be classified as liabilities by the subsidiary, under the “only upon liquidation” exception in paragraph 9 of Statement 150, but would be classified as liabilities by the parent in consolidated financial statements, the classification and measurement provisions of Statement 150 are deferred indefinitely pending further Board action.
The Group, see Note 22, issued various noncumulative, nonvoting, preferred stock guaranteed by Banco Bilbao Vizcaya Argentaria, S.A., the parent company. These issues were subscribed by third parties outside the Group and are wholly or partially redeemable at the Company’s option after five or ten years from the issue date, depending on the terms of each issue. According to SFAS 150, as redemption of preferred stock is required upon liquidation or termination of the issuers (BBVA subsidiaries) this Statement does require the obligation to report preferred stock as a liability in the consolidated financial statements of BBVA Group. However, these preferred stocks are included under the Scope of FSP Staff Position 150-3 and therefore, following FSP 150-3, the Group deferred the application of SFAS 150 as of December 31, 2003.
As of December 31, 2004, the Group has applied SFAS 150 or FIN 46-R to all preferred stocks to variable interest entities issuers of preferred stock the impact on financial statements are as follows:
This adjustment reflects the reclassification amounting to €3,798,235 thousand and €350,000 thousand in 2004 and 2003, respectively, in the consolidated balance sheet (see note 32.2.C.2) from “Minority Interest” caption to “Time Deposits” caption. The dividends paid by the preferred stock amounting to €189,985 thousand and €288 thousand in 2004 and 2003, respectively, should be reclassified in the consolidated balance sheet (see note 32.2.C.2) from “Minority Interest” caption to “Time Deposits” caption.
The effect on 2003 financial statements considers only issues made after January 31, 2003 and therefore subject to FIN 46-R while the effect on 2004 financial statements considers all preference shares issued though VIEs despite the date of issuance of the preference shares. Had the Company followed in 2003 the criteria of considering all preference shares, the reclassification from “Minority Interest” to “Time Deposits” would have amounted to €4,105,543 thousand
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19. New Accounting Standards
Statements of Financial Accounting Standards No. 123 (Revised 2004): Share-Based Payment
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared Based Payments (SFAS 123R). This statement eliminates the option to apply the intrinsic value measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” to stock compensation awards issued to employees. Rather, SFAS 123R requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award - the requisite service period (usually the vesting period). SFAS 123R applies to all awards granted after the required effective date, December 15, 2005, and to awards modified, repurchased, or cancelled after that date. SFAS 123R will be effective for our fiscal year ending December 31, 2005. The Company does not anticipate that adoption of this Standard will have a material effect on its financial position, results of operations, or cash flows.
Statements of Financial Accounting Standards No. 151: Inventory Costs – An Amendment of ARB No. 43, Chapter 4
On November 24, 2004, the FASB issued SFAS No. 151, “Inventory Cost, a revision of ARB No. 43, Chapter 4”. The amendments to SFAS No. 151 aim to improve financial information, stating that the expenses of inactive facilities, transportation costs, manipulation costs and scrap material costs should be recorded in the statement of operation as expenses of the period. The application of fixed cost to inventories should be based on the normal capacity of the production facilities. SFAS No. 151 will be applicable to valuation of Inventories by the end of the first reporting period ending after June 15, 2005. The Company does not anticipate that the adoption of SFAS No. 151 will have a material impact on its financial position, cash flows or results of operations.
Statements of Financial Accounting Standards No. 153: Exchanges of Non-monetary Assets - An Amendment of APB Opinion No. 29
On December 16, 2004, the FASB issued SFAS No.153, “Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29”, which amends Accounting Principles Board Opinion No. 29 “Accounting for Nonmonetary Transactions”. This amendment is based on the idea that exchange transactions should be valued in accordance with the value of the exchanged assets. The exception made for similar non-monetary productive assets is eliminated and substituted by a more extensive exception related to non-monetary assets with a non-commercial consideration. APB No. 29 stated that the exchange transaction of a productive asset for a similar one should be recorded at the book value of the exchanged asset.
SAS No. 153 will be applicable for non-monetary asset exchange transactions occurring in fiscal periods beginning after June 15, 2005. The Company does not anticipate that the adoption of SFAS No. 153 will have a material impact on its financial position, cash flows or results of operations.
SAB No. 107: Shared Based Payment
On March 29, 2005, the SEC released a Staff Accounting Bulletin (SAB) relating to the FASB accounting standard for stock options and other share-based payments. The interpretations in SAB No. 107, “Share-Based Payment,” (SAB 107) express views of the SEC Staff regarding the application of SFAS No. 123 (revised 2004), “Share-Based Payment “(Statement 123R). Among other things, SAB 107 provides interpretive guidance related to the interaction between Statement 123R and certain SEC rules and regulations, as well as provides the Staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company does not anticipate that adoption of SAB 107 will have any effect on its financial position, results of operations or cash flows.
EITF 04-1: Accounting for Preexisting Relationships between the Parties to a Business Combination
This Issue addresses the accounting for preexisting relationships between the parties to a business combination. The consensuses in this Issue should be applied to business combinations consummated and goodwill impairment tests performed in reporting periods beginning after October 13, 2004. The application of this new accounting literature by BBVA had no impact on its financial position, cash flows or results of Operations.
SOP No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”
In December, 2003, AICPA (the American Institute of Certified Public Accountants) issued SOP No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”. It is effective for loans acquired in fiscal
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years beginning after December 15, 2004. It requires acquired loans to be recorded at fair value and prohibits carrying over valuation allowances in the initial accounting for all loans acquired in a transfer that have evidence of deterioration in credit quality since origination, when it is probable that the investor will be unable to collect all contractual cash flows. Certain loans such as mortgage loans held-for-sale, loans carried at fair value, and loans to borrowers under revolving credit agreements and in good standing could be excluded from the scope of this statement. The yield that may be accreted is limited to the excess of the undiscounted expected cash flows over the investor’s initial investment in the loan. The excess of the contractual cash flows over expected cash flows may not be recognized as an adjustment of yield. Subsequent increases in cash flows expected to be collected are recognized prospectively through an adjustment of the loan’s yield over its remaining life. Decreases in expected cash flows are recognized as impairment. The Bank will apply SOP No. 03-3 for loans acquired in fiscal years beginning after December 15, 2004.
Final rule 33-8567 related to First-Time Application of International Financial Reporting Standards (“IFRS”)
In April, 2004, SEC (the Securities and Exchange Commission) issued final rule 33-8567 related to First-Time Application of International Financial Reporting Standards (“IFRS”). The Commission is adopting amendments to Form 20-F to provide a onetime accommodation relating to financial statements prepared under International Financial Reporting Standards (“IFRS”) for foreign private issuers registered with the SEC. This accommodation applies to foreign private issuers that adopt IFRS prior to or for the first financial year starting on or after January 1, 2007. The accommodation permits eligible foreign private issuers for their first year of reporting under IFRS to file two years rather than three years of statements of income, changes in shareholders’ equity and cash flows prepared in accordance with IFRS, with appropriate related disclosure. The accommodation retains current requirements regarding the reconciliation of financial statement items to generally accepted accounting principles as used in the United States (“U.S. GAAP”). In addition, the Commission is amending Form 20-F to require certain disclosures of all foreign private issuers that change their basis of accounting to IFRS. In 2005 the BBVA Group will present its financial information in accordance to IFRS and will be subject to the requirements of this proposed rule.
Staff Accounting Bulletin (SAB) No. 105, “Application of Accounting Principles to Loan Commitments”
In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 105, “Application of Accounting Principles to Loan Commitments”. SAB 105 requires that the fair value measurement of loan commitments, which are derivatives, exclude any expected future cash flows related to the customer relationship or servicing rights. The guidance in SAB 105 must be applied to loan commitments entered into after March 31, 2004. The adoption of SAB 105 did not have a material impact on BBVA’s financial statements.
SFAS No. 154, “Accounting Changes and Error Corrections”
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” which replaces Accounting Principles Board Opinions No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28”. This statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Bank will apply these requirements to any accounting changes after the implementation date.
FASB Interpretation No. 47: Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143
On March 2005, FASB issued FASB Interpretation No. 47. The Board concluded that asset retirement obligations within the scope of Statement 143 that meet the definition of a liability in Concepts Statement 6 should be recognized as a liability at fair value if fair value can be reasonably estimated. The Board believes that when an existing law, regulation, or contract requires an entity to perform an asset retirement activity, an unambiguous requirement to perform the retirement activity exists, even if that activity can be deferred indefinitely. At some point, deferral is no longer possible, because no tangible asset will last forever, except land. Therefore, the obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. The use of an expected value technique to measure the fair value of the liability reflects any uncertainty about the amount and timing of future cash outflows. This Interpretation is effective no later than December 31, 2005, for calendar-year enterprises. The Bank does not anticipate that adoption of FIN 47 will have any effect on its financial position, results of operations or cash flows.
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20. SFAS 140- Accounting For The Transfers And Servicing Of Financial Assets And Extinguishments Of Liabilities
In September 2000, the Financial Accounting Standards Board issued Statement No. 140 (“SFAS 140”), Accounting For The Transfers And Servicing Of Financial Assets And Extinguishments Of Liabilities, which replaces SFAS 125 (of the same title). SFAS 140 revises certain standards in the accounting for securitizations and other transfers of financial assets and collateral, and requires some disclosures relating to securitization transactions and collateral, but it carries over most of SFAS 125’s provisions. As explained in note 32.2.A the accounting of transfer of Financial Assets under Spanish GAAP does not present significant differences with respect to U.S. GAAP.
Under Spanish GAAP securitizations are accounted for following the “transfer of financial assets” rules. During 2004, 2003 and 2002 the Group transferred loans to securizitation funds (See Note 8).
Securitization funds (the vehicle where securitized loans are transferred) are independent entities, from BBVA Group. These funds, which are managed by the “Sociedad Gestora” (Managing Society), are registered and regulated by the Comisión Nacional del Mercado de Valores (CNMV). “Sociedad Gestora” is responsible for the management of the transferred loans by gathering a fixed fee.
The “Managing society” is usually controlled by BBVA, however control of BBVA over it does not affect control over the transferred assets. It is considered that control over the financial assets has been surrendered since: (1) there is no agreement that both entitles and obligates the transferor to repurchase o redeem them before their maturity and (2) BBVA does not have the ability to unilaterally cause the holder to return specific assets Activities of the securitization funds are limited and specified in the legal document that established the fund.
Securitizations fund may only held:
All the conditions described above allows us to consider securitization funds as Qualified SPE under U.S. GAAP with the exception of the following funds:
These two funds do not meet the conditions of true sale since the bank holds the majority of the beneficial interest issued.
No gains or losses were registered in earnings for all securitizations because the selling price was equal to the book value of transferred loans. Therefore no adjustment was made in reconciliation to U.S. GAAP.
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The outstanding balance of the transferred loans as of December 31, 2004 and 2003, and the total interest accrued during the year 2004 and 2003 amounts to:
Thousand of Euros
Loans
Allowance for loan losses
Net loans
Interest Revenues
The roll forward of “Allowance for loans losses” in 2004 and 2003, was as follows:
Beginning Balance
Transfer to loans write-off
Ending Balance
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21. Consolidated Statements of Cash-Flows-
The following combined statements of cash flows for 2004, 2003 and 2002, are presented in connection with U.S. Statement of Financial Accounting Standards No. 95 and reflect the adoption of U.S. Statement of Financial Accounting Standards No. 104.
Cash Flows from Operating Activities:(a)
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and depreciation
Provision for loan losses and special reserves
Net decrease (increase) in trading securities
Gains on sale of premises and equipment
Gains on sale of investment securities and affiliated companies securities
Increase (Decrease) in taxes payable
Net decrease (increase) in interest receivable and payable and other accrued income and expenses
Net cash provided by operating activities
Cash Flows from Investing Activities:
Net decrease (increase) in interest bearing with banks
Net decrease (increase) in securities purchased under agreements to resell
Purchase of investment securities and affiliated companies
Proceeds from sales of investment securities and affiliated companies
Net decrease (increase) in loans and leases
Purchase of premises and equipment
Proceeds from sales of premises and equipment
Other investing activities
Net cash used in investing activities
Cash Flows from Financing Activities:
Net increase (decrease) in non-interest-bearing deposits
Net increase (decrease) in demand deposits
Net increase (decrease) in savings deposits
Net increase (decrease) in time deposits
Net increase (decrease) in other Bank of Spain and Deposit Guarantee Fund
Net increase (decrease) in short-term borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt
Other financing activities
Capital increase
Net cash provided by financing activities
Net increase in cash and due from banks
Cash and due from banks at beginning of the year(b)
Cash and due from banks at end of the year(b)
Income taxes
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During 2004, 2003 and 2002 the most important non-cash transactions made by the Group were the transfers of loans to assets acquired through foreclosure amounting approximately, €109,913 thousand, € 144,619 thousand and €237,895 thousand, respectively.
1. Differences relating to the financial statements presentation-
In addition to differences between Spanish and U.S. GAAP, described above in Note 32.2.B, affecting to net income and/or stockholders’ equity, there are several differences relating to the financial statements presentation exist between Spanish and U.S. GAAP presentation following the formatting guidelines in Regulation S-X of the Securities and Exchange Commission of the United States. Although these differences do not cause differences between Spanish and U.S. GAAP reported net income and/or stockholders’ equity. It may be useful to understand them to better interpret the Group’s financial statements presented in accordance with U.S. GAAP. Following is a summary of the significant classification differences that pertain to the basic financial statements.
Balance Sheet-
Under U.S. GAAP, “Securities purchased under agreement to resell” are presented as a separate item.
Under U.S. GAAP, investments in debt and equity securities (other than investments in affiliated companies) are presented under the caption “Investment securities”.
In this caption the following adjustments due to reconciliation in Note 32.2.B are included:
1. “Reversal of the net effect of revaluation of equity securities” (see note 32.2.B.2), this adjustment supposes a decrease of these assets amounted to €3,029 thousand, in 2004, 2003 and 2002, respectively.
2. “Effect of following the equity method of accounting for investments in affiliated companies” (see note 32.2.B.3), this adjustment supposes an increase of these assets amounted to €3,125,764 thousand, €3,638,685 thousand and €4,867,546 thousand in 2004, 2003 and 2002, respectively.
3. “Valuation of investment securities (equity securities)” (see note 32.2.B.9), this adjustment supposes an increase of these assets amounted to €2,534,731 thousand, €2,135,981 thousand and €754,378 thousand in 2004, 2003 and 2002, respectively.
4. “Valuation of investment securities (debt securities)” (see note 32.2.B.9), this adjustment supposes an increase of these assets amounted to €789,584 thousand, €69,160 thousand and €355,606 thousand in 2004, 2003 and 2002, respectively.
5. “Derivative instruments and hedging activities (SFAS 133)” (see note 32.2.B.11), this adjustment supposes an increase of these assets amounted to €44,107 thousand, €58,359 thousand and €130,508 thousand in 2004, 2003 and 2002, respectively.
6. “Amortization of surplus allocated to specific assets and liabilities” (see note 32.2.B.1), this adjustment supposes an increase of these assets amounted to €23,883 thousand, €29,035 thousand and €71,954 thousand in 2004, 2003 and 2002, respectively.
7. In “Accounting of goodwill” (see note 32.2.B.5) the effect of the surplus allocated to specific assets an liabilities in the acquisition of BBVA Bancomer supposes a decrease of €28,576 thousand in 2004.
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1. “Employee loans issued to purchase shares of capital Stock” (see note 32.2.B.8), this adjustment supposes a decrease of these assets amounted to €12,139 thousand , €1,766 thousand and €2,479 thousand in 2004, 2003 and 2002, respectively.
2. “Amortization of surplus allocated to specific assets and liabilities” (see note 32.2.B.1), this adjustment supposes an increase of these assets amounted to €427,659 thousand, €465,642 thousand and €521,699 thousand in 2004, 2003 and 2002, respectively.
3. “Allowance for loan losses” (see note 32.2.B.7), this adjustment supposes an increase of these assets amounted to €1,054,228 thousand, €779,694 thousand and €686,058 thousand in 2004, 2003 and 2002, respectively.
4. In “Accounting of goodwill” (see note 32.2.B.5) the effect of the surplus allocated to specific assets an liabilities in the acquisition of BBVA Bancomer supposes an increase of €386,857 thousand in 2004.
1. “Elimination of over-depreciation relating to restated fixed assets, recognition of additional profits on the sale and disposal of restated items” (see note 32.2.B.2), this adjustment supposes a decrease of these assets amounted to €294,482 thousand, €313,082 thousand and €363,059 thousand in 2004, 2003 and 2002, respectively.
2. “Elimination of the inflation adjustment in non highly inflationary countries” (see note 32.2.B.12), this adjustment supposes a decrease of these assets amounted to €491,925 thousand, €431,496 thousand and €269,039 thousand in 2004, 2003 and 2002, respectively.
3. In “Accounting of goodwill” (see note 32.2.B.5) the effect of the surplus allocated to specific assets an liabilities in the acquisition of BBVA Bancomer supposes a decrease of €24,861 thousand in 2004.
Under U.S. GAAP, these investments and the goodwill are presented under “Investments in affiliated companies”.
1. “Effect of following the equity method of accounting for investments in affiliated companies” (see note 32.2.B.3), this adjustment supposes a decrease of these assets amounted to €3,573,296 thousand, €4,061,742 thousand and €5,147,643 thousand in 2004, 2003 and 2002, respectively.
2. “Valuation of investment securities (equity securities)” (see note 32.2.B.9), this adjustment supposes an increase of these assets amounted to €197,934 thousand in 2004 and a decrease of these assets amounted to €5,892 thousand and €4,053 thousand in 2003 and 2002, respectively.
Under U.S. GAAP, such assets are presented under “Other assets”.
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In the caption “Intangible assets” the following adjustments due to reconciliation in Note 32.2.B are included:
1. “Expenses of capital increase” (see note 32.2.B.10), this adjustment supposes a decrease of these assets amounted to €48,093 thousand, €32,302 thousand and €53,051 thousand in 2004, 2003 and 2002, respectively.
2. “Start up expenses” (see note 32.2.B.10), this adjustment supposes a decrease of these assets amounted to €10,256 thousand, €19,537 thousand and €98,460 thousand in 2004, 2003 and 2002, respectively.
3. In “Accounting of goodwill” (see note 32.2.B.5) the effect of the surplus allocated to specific assets an liabilities in the acquisition of BBVA Bancomer supposes an increase of €665,729 thousand in 2004.
In the caption “Goodwill in consolidation” the following adjustments due to reconciliation in Note 32.2.B are included:
1. “Accounting of Goodwill” (see note 32.2.B.5), this adjustment supposes a decrease of these assets amounted to €140,473 thousand , €259,637 thousand and €179,129 thousand in 2004, 2003 and 2002, respectively.
2. “Amortization of remaining Goodwill merger Argentaria” (see note 32.2.B.1), this adjustment supposes an increase of these assets amounted to €5,332,924 thousand in 2004, 2003 and 2002, respectively.
3. In “Accounting of goodwill” (see note 32.2.B.5) the effect of of the surplus allocated to specific assets an liabilities in the acquisition of BBVA Bancomer supposes a decrease of €1,054,869 thousand in 2004.
In the caption “Others” the following adjustments due to reconciliation in Note 32.2.B are included:
1. “Pensions plan cost and early retirements” (see notes 32.2.B.4.1 and 32.B.4.2), this adjustment supposes an increase of these assets amounted to €122,098 thousand, €134,307 thousand and €146,516 thousand in 2004, 2003 and 2002, respectively.
2. “Tax effect of above mentioned adjustments” and “Effect of following SFAS 109 in the accounting for income taxes for each year” (see note 32.2.B.13), these adjustments suppose a decrease of these assets amounted to €19,076 thousand, €225,077 thousand and €40,396 thousand in 2004, 2003 and 2002, respectively.
3. “Amortization of surplus allocated to specific assets and liabilities” (see note 32.2.B.1), this adjustment supposes an increase of these assets amounted to €12,235 thousand, €17,172 thousand and €22,007 thousand in 2004, 2003 and 2002, respectively.
4. “Derivative instruments and hedging activities” (SFAS 133) (see note 32.2.B.11), these adjustments suppose an increase of these assets amounted to €15,015 thousand, €90,618 thousand in 2004 and 2003, respectively, and a decrease of these assets amounted to €120,962 thousand in 2002.
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5. “BBV Brasil transaction” (see note 32.2.B.14), this adjustment supposes a decrease of these assets amounted to €56,186 in 2002.
6. In “Accounting of goodwill” (see note 32.2.B.5) the effect of the surplus allocated to specific assets an liabilities in the acquisition of BBVA Bancomer supposes an increase of €160,121 thousand in 2004.
1. “Application of SFAS No. 150” (see note 32.2.B.18) which supposes an increase of these liabilities amounted to €3,798,235 thousand in 2004 and €350,000 thousand in 2003.
2. In “Accounting of goodwill” (see note 32.2.B.5) the effect of of the surplus allocated to specific assets an liabilities in the acquisition of BBVA Bancomer supposes an increase of €103,687 thousand in 2004.
Under U.S. GAAP, such funds are presented under “Deposits” classified by nature, except securities sold under agreements to repurchase and other short-term borrowings, which are presented under the caption “Short term borrowings”.
In the caption “Long term debt”, the adjustment “Amortization of surplus allocated to specific assets and liabilities” (see note 32.2.B.1) is included. This adjustment supposes an increase of these liabilities amounted to €34,950 thousand, €49,058 thousand and €62,873 thousand in 2004, 2003 and 2002, respectively.
In “Accounting of goodwill” (see note 32.2.B.5) the effect of the surplus allocated to specific assets an liabilities in the acquisition of BBVA Bancomer supposes an increase of €37,047 thousand in 2004.
In the caption “Taxes payable”, the adjustment “Amortization of surplus allocated to specific assets and liabilities” (see note 32.2.B.1) is included. This adjustment supposes an increase of these liabilities amounted to €158,585 thousand, €173,681 thousand and €207,778 thousand in 2004, 2003 and 2002, respectively (see note 32.2.B.18).
In the caption “Accrual accounts”, the following adjustment are included:
1. “Application of SFAS No. 150” supposes an increase of these liabilities amounted to €189,985 thousand and €288 thousand, in 2004 and 2003, respectively.
2. “Loan origination fees” (see note 32.2.B.7) supposes an increase of these liabilities amounted to €72,450 thousand in 2004.
In the caption “Pension allowance” the adjustment “Early retirements” (see note 32.2.B.4.2) is included. This adjustment supposes an increase of these liabilities amounted €200 thousand and €374 thousand, in 2003 and 2002, respectively.
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In the caption “Other provision” the adjustment “Termination indemnities” (see note 32.2.B.4.3) is included. This adjustment supposes a decrease of these liabilities amounted to €60,076 thousand, €39,573 thousand and €37,490 thousand in 2004, 2003 and 2002, respectively.
In the caption “Others” of the liabilities the following adjustments due to reconciliation in Note 32.2.B are included:
1. “Accounting of goodwill” (see note 32.2.B.5), this adjustment supposes a decrease of these liabilities amounted to €37,238 thousand, €38,712 thousand and €47,554 thousand in 2004, 2003 and 2002, respectively.
2. “Effect of following the equity method of accounting for investments in affiliated companies” (see note 32.2.B.3), this adjustment supposes a decrease of these liabilities amounted to €4,093 thousand in 2002.
3. “Gains on transactions with parent company shares and stock options owned by subsidiaries accounted for as income for the year” (see note 32.2.B.6), this adjustment supposes a decrease of these liabilities amounted to €27,655 thousand, €28,213 thousand and €26,752 thousand in 2004, 2003 and 2002, respectively.
4. In “Accounting of goodwill” (see note 32.2.B.5) the effect of the surplus allocated to specific assets an liabilities in the acquisition of BBVA Bancomer supposes an increase of €359,794 thousand in 2004.
5. “Tax effect of above mentioned adjustments” and “Effect of following SFAS 109 in the accounting for income taxes for each year” (see note 32.2.B.13), this adjustment supposes an increase of these liabilities amounted to €1,378,284 thousand, €768,863 thousand and €275,368 thousand in 2004, 2003 and 2002, respectively.
6. “BBV Brasil transaction” (see note 32.2.B.14), this adjustment supposes a decrease of these liabilities amounted to €60,437 thousand in 2002.
In the caption “Minority interest” the adjustments due to reconciliation in Note 32.2.B suppose a decrease of these liabilities amounted to €4,243,566 thousand, €646,384 thousand and €123,704 thousand in 2004, 2003 and 2002, respectively.
In the caption “Retained earnings and other reserves”, the adjustments due to reconciliation in Note 32.2.B suppose an increase of these liabilities amounted to €7,427,312 thousand, €6,808,809 thousand and €6,305,348 thousand in 2004, 2003 and 2002, respectively.
Statement of Income-
1. “Application of SFAS No. 150” (see note 32.2.B.18) which supposes a decrease of these interests amounted to €189,985 thousand and €288 thousand in 2004 and 2003, respectively.
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2. In “Accounting of goodwill” (see note 32.2.B.5) the effect of the surplus allocated to specific assets an liabilities in the acquisition of BBVA Bancomer supposes a decrease of €273,287 thousand in 2004.
3. “Loan origination fees” (see note 32.2.B.7) which supposes a decrease of these interest amounted to €72,450 thousand in 2004.
Under U.S. GAAP, we separate the main items and then we distinguish each main item between fees received and paid.
1. “Effect of following the equity method of accounting for investments in affiliated companies” (see note 32.2.B.3) is included. This adjustment supposes a decrease of these gains amounted to €182,376 thousand, €272,377 thousand and €133,008 thousand in 2004, 2003 and 2002, respectively.
2. “Accounting of goodwill” (see note 32.2.B.5) supposes an increase amounted to €9,261 thousand and €15,462 thousand in 2004 and 2003, respectively.
Under U.S. GAAP, such gains and losses are disclosed separately under “Gains (losses) from investment securities” and “Other Income”.
1. “Effect of following the equity method of accounting for investments in affiliated companies” (see note 32.2.B.3), this adjustment supposes an increase of income amounted to €169,185 thousand, €163,927 thousand and €73,277 thousand in 2004, 2003 and 2002, respectively.
2. “Valuation of investment securities (equity securities)” (see note 32.2.B.9), this adjustment supposes an decrease of income amounted to €99,782 thousand, €224,155 thousand in 2004 and 2003, respectively, and an increase of income amounted €425,795 thousand in 2002.
3. “Valuation of investment securities (debt securities)” (see note 32.2.B.9), this adjustment supposes an increase of income amounted to €218,127 thousand in 2004, and a decrease of income amounted to €326,498 thousand in 2003.
4. “Amortization of surplus allocated to specific assets and liabilities” (see note 32.2.B.1), this adjustment supposes a decrease of income amounted to €18,868 thousand, €55,899 thousand and €154,690 thousand in 2004, 2003 and 2002, respectively.
5. “Derivative instruments and hedging activities (SFAS 133)” (see note 32.2.B.11), this adjustment supposes a decrease of income amounted to €42,257 thousand in 2004, an increase of income amounted to €211,580 thousand in 2003, and a decrease of income amounted to €106,123 thousand in 2002.
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1. “Elimination of over-depreciation relating to restated fixes assets, recognition of additional profits on the sale and disposal of restated items” (see note 32.2.B.2.1), this adjustment supposes an increase of income amounted to €18,598 thousand, €49,978 thousand and €68,360 thousand in 2004, 2003 and 2002, respectively.
2. “Elimination of the inflation adjustment in non highly inflationary countries” (see note 32.2.B.12), this adjustment supposes an increase of income amounted to €42,658 thousand and €55,406 thousand in 2004 and 2003, respectively, and a decrease of income amounted to €4,780 thousand in 2002.
3. “BBV Brasil transaction” (see note 32.2.B.14), this adjustment supposes an increase of these gains amounted to €4,251 thousand in 2002.
4. “Gains on transactions with parent company shares and stock options owned by subsidiaries accounting for as income for the year” (see note 32.2.B.6) supposes a decrease of these gains amounted to €41,437 thousand in 2004, and an increase of these gains amounted to €23,363 thousand and €24,585 thousand in 2003 and 2002, respectively.
1. “Early retirements” (see note 32.2.B.4.2), this adjustment supposes an increase of provision amounted to €200 thousand, €174 thousand and €432 thousand in 2004, 2003 and 2002, respectively.
2. “Termination indemnities” (see note 32.2.B.4.3), this adjustment supposes an increase of income amounted to €20,503 thousand, €2,083 thousand in 2004 and 2003, respectively, and a decrease of income amounted to €23,079 thousand in 2002.
Under U.S. GAAP, such expenses are included as a part of “Occupancy expenses of premises, depreciation and maintenance”.
Under U.S. GAAP, such amortization is included under “Other expenses”.
In the caption “Other expenses” of the statement of income, the following adjustments due to reconciliation in Note 32.2.B are included:
1. “Expenses of capital increase” (see note 32.2.B.10), this adjustment supposes a decrease of expenses amounted to €29,072 thousand, €22,764 thousand and €21,958 thousand in 2004, 2003 and 2002, respectively.
2. “Start up expenses” (see note 32.2.B.10), this adjustment supposes a decrease of expenses amounted to €9,283 thousand, €67,813 thousand and €26,461 thousand in 2004, 2003 and 2002, respectively.
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U.S. GAAP description of Extraordinary Income is more restrictive than the Spanish GAAP description (non-banking results), for this reason the main portion of “Extraordinary income” and “Extraordinary expenses” in the Spanish GAAP captions are presented under the “Other income” and “Other expenses” captions, respectively, for U.S. GAAP purposes.
In the caption “Minority shareholder’”, the adjustments due to reconciliation in Note 32.2.B suppose a decrease of minority income amounted to €140,298 thousand, €95,881 thousand and €10,577 thousand in 2004, 2003 and 2002, respectively.
2. Consolidated Financial Statements under Regulation S-X-
Following are the consolidated balance sheets of the BBVA Group as of December 31, 2004, 2003 and 2002 and the consolidated statement of income for each of the years ended December 31, 2004, 2003 and 2002, in the format for banks and bank holding companies required by Regulation S-X of the Securities and Exchange Commission of the United States of America, and, accordingly, prepared in accordance with Spanish GAAP (before reconciliation adjustments) and under U.S. GAAP (after reconciliation adjustments described above in Note 32.2.B).
The companies consolidated by the proportional method under SP GAAP as described in Note 2-c are not fully consolidated. The effect in the total assets would be less than 1% (see note 32.2.D.3).
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BANCO BILBAO VIZCAYA ARGENTARIA GROUP
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004, 2003 AND 2002
(Currency—Thousands of Euros)
Before
Reconciliationadjustments
Reconciliation
adjustments
U.S. GAAP.
After
Cash and due from banks
Interest-bearing deposits in other banks
Securities purchased under agreements to resell
Trading securities
Available for sale
Held to maturity
Investments securities(1)
Loans and leases, net of unearned income (2)
Less: Allowance for loan losses
Net loans and leases(2)
Premises and equipment, net
Investments in affiliated companies
Accrual accounts
Total other assets
Liabilities and Stockholders’ Equity
Non-interest deposits
Interest bearing:
Demand deposits
Savings deposits
Total deposits
Due to Bank of Spain & Deposits Guarantee Fund
Short-term borrowings
Long-term debt
Taxes payable
Accounts payable
Pension allowance
Other Provisions
Total other liabilities
Minority interest
Capital stock
Other additional capital
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
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DECEMBER 31, 2004, 2003 AND 2002
Interest and fees on loans and leases
Interest on deposits in other banks
Interest on securities purchased under agreements to resell
Interest on investment securities
Total interest income
Interest Expense
Interest on deposits
Interest on Bank of Spain & Deposit Guarantee Fund
Interest on short-term borrowings
Interest on long term debt
Total interest expense
Provision for loan losses
Net Interest Income after provision for loan losses
Non-interest income
Contingent liabilities (collected)
Collection and payments services (collected)
Securities services (collected)
Other transactions (collected)
Ceded to other entities and correspondents (paid)
Other transactions (paid)
Gains (losses) from:
Affiliated companies’ securities
Foreign exchange, derivatives and other, net
Other income
Total non-interest income
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Non-interest expense
Salaries and employee benefits
Occupancy expense of premises, depreciation and maintenance, net
General and administrative expenses
Amortization of goodwill
Net provision for specific allowances
Minority shareholder’s interest
Total non-interest expense
Income Before Income Taxes
Income tax expense
Net Consolidated Income for the year
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3. Condensed Financial Statements of Banco Bilbao Vizcaya Argentaria, S.A (Parent Company Only)-
Following are the summarized balance sheets of Banco Bilbao Vizcaya Argentaria, S.A. as of December 31, 2004, 2003 and 2002:
CONDENSED BALANCE SHEETS (Parent company only)
Investment in subsidiaries and affiliated companies
Loans, net
Due to Bank of Spain and Deposits Guarantee Fund
Retained earnings and other reserves
Total stockholder’s equity
Total liabilities and stockholder’s equity
Following are the summarized statements of income of Banco Bilbao Vizcaya Argentaria, S.A. as of December 31, 2004, 2003 and 2002:
CONDENSED STATEMENTS OF INCOME (Parent Company only)
Interest from earning assets
Interest and dividends from subsidiaries
Consolidated
Nonconsolidated
Provision for possible loan losses
Net interest income after provisions for possible loan losses
Noninterest income
Noninterest expense
Income before income taxes
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4. Consolidated Statements of Changes in Stockholders equity (Notes 1,2-d, 23 and 24)-
As of December 31, 2003 and 2002, there have not been variations in the number of registered shares.
Composition of stockholders’ equity (considering the final dividend) of December 31, 2004, 2003 and 2002, is presented in Note 2-d. The variation in stockholders’ equity under U.S. GAAP as of December 31, 2004, 2003 and 2002 is as follows:
Balance at the beginning of the year
Net income for the year
Foreign Currency Translation Adjustment
Unrealized Gains on Securities
Derivatives Instruments and Hedging Activities (SFAS 133)
Balance at the end of the year
As described in Note 2-e, as of December 31, 2004, 2003 and 2002, the computable equity of the Group was higher than the minimum requirements stipulated by the Spanish regulation.
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1. Investment Securities-
The breakdown of the Group’s investment securities portfolio by issuer is as follows:
Unrealized
Losses
TRADING PORTFOLIO
Spanish Government
Other Fixed Interest Securities
AVAILABLE FOR SALE PORTFOLIO
Domestic-
Other Spanish public authorities
Other domestic issuers
International-
United States-
US Treasury and other US Government agencies
Other countries-
Securities of other foreign Governments
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Other debt securities outside Spain
HELD TO MATURITY PORTFOLIO
TOTAL DEBT SECURITIES (NET)
EQUITY SECURITIES
TOTAL EQUITY SECURITIES (NET)
TOTAL INVESTMENT SECURITIES (NET)
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An analysis of the book value of investments, exclusive of valuation reserves, by contractual maturity and fair value of the debt securities portfolio is shown below:
Due in one
year or less
Due after one
year throughfive years
Due afterfive yearsthrough
ten years
Due after
• Investment securities:
• Spanish Treasury Bills
• Other Spanish Government securities
• Held to maturity portfolio
• Trading Portfolio
FIXED INCOME PORTFOLIO
International:
• U.S. Treasury Securities and other US Government agencies
• States and political subdivisions
• Other Securities
• Securities of other foreign Governments
• Other debt securities outside Spain
Total other countries
Total International Inv. Sec.
• Other securities
• Held to maturity securities
International
• Investment Securities:
• Spanish Treasury bills
• Other Spanish Government Securities
• Investment Securities
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• Us treasury Securities and other Us Government agencies
Other countries:
Total International
Total Domestic
Due afterone
F - 161
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See also Notes 6, 9 and 10 for other breakdowns of the Group’s investment securities portfolio as of December 31, 2004, 2003 and 2002. As of December 2004, 2003 and 2002, the carrying values of non-traded (unlisted) debt securities portfolio amounted to €5,960,701 thousand, €6,671,421 thousand and €11,178,018 thousand, respectively. As of December 2004, 2003 and 2002, the carrying values of non-traded (unlisted) equity securities portfolio amounted to €771,296 thousand, €622,334 thousand and €800,758 thousand, respectively.
Under both Spanish GAAP and U.S. GAAP, the methodology used to estimate the fair value of non-traded or unlisted securities is as follows:
These methodologies include an evaluation of credit risk, market conditions (volatility, interest rate evolution, macroeconomic variables, etc…) or futures expectations.
The breakdown of unrealized losses as of December 31, 2004, 2003 and 2002, is as follows:
According to the table, most of unrecognized losses as of December 31, 2002, arose in such year.
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The total amount of unrealized losses amounted to €136,474 thousand, €60,250 thousand and €551,800 thousand as of December 31, 2004, 2003, and 2002, respectively, and correspond to the sum of temporary plus other-than-temporary impairments:
Unrealized losses
- Equity Securities
- Debt Securities
(1) Total Impairments Other - than - temporary(charged to income under both GAAP)
- Debt securities
- Other (*)
(2) Total Temporary Unrealized losses
(1) + (2) Total unrecognized losses
As of December 2004, unrealized losses of debt securities and equity securities correspond basically to Argentinean debt securities and Mexican securities not listed held by Group BBVA, respectively.
As of December 2003, most of unrealized losses correspond to debt securities. These unrealized losses arose during last six moths of 2003. Due to the limited length of unrealized losses and the future expectation of management that expects a substantial recovery of them, these unrealized losses were considered as temporary.
The main types of securities or industries regarding unrealized losses in 2002 were as follows:
The caption“Securities of other foreign governments” whose unrealized losses amounted to 116,531 thousand euro, mainly included debt securities owned by our subsidiaries in Latin America and issued by the governments of:
The caption “Equity securities - Domestic” whose unrealized losses amounted to 156,703 thousand of euros, mainly included listed securities issued by Spanish companies held by the parent company. Unrealized losses amounting to €146,190 thousand corresponds to an investment whose market value decreased below carrying value during the second half of 2002 and which had increases in market price during the first semester of 2003. Management considered that the evolution of this quotation in the Spanish market evidenced that an impairment was not necessary. Therefore under Spanish GAAP and U.S. GAAP, this decline was considered as temporary.
The caption “Equity securities - International” whose unrealized losses amounted to 222,302 thousand euro, mainly included the following securities:
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2. Loans and Accounting by Creditors for Impairment of a Loan-
The balance of the recorded investment in impaired loans and of the related valuation allowance as of December 31, 2004, 2003 and 2002 is as follows:
Impaired loans requiring no reserve
Impaired loans requiring valuation allowance
Total impaired loans
Valuation allowance on impaired loans
The roll-forward of allowance is shown in Note 8 under Spanish GAAP. The reconciliation item to U.S. GAAP is in Note 32.2.B.7.
The approximate amount of interest collected concerning to substandard loans (and included in income) related to the current year amounted to €225,649 thousand, €278,324 thousand and €73,907 thousand in 2004, 2003 and 2002, respectively and those related to prior years amounted to €77,043 thousand, €79,099 thousand and €53,123 thousand in 2004, 2003 and 2002, respectively.
Interest revenue that would have been recorded if accruing
Net interest revenue recorded:
Related to current year
Related to prior years
Positive (negative) impact of non-performing loans on interest revenue
3. Investments In And Indebtedness Of And To Affiliates-
See Notes 11 and 12 and Exhibit 8.1, Parts II and III for detailed information of investments in nonconsolidated Group companies and other affiliates, and Note 27 for transactions of consolidated companies with such affiliates. Aggregated summarized financial information with respect to significant affiliated companies under Spanish GAAP for the years ended December 31, 2004 is presented below:
Percentage of ownership-
Net sales
Operating income
Current assets
Noncurrent assets
Current liabilities
Non-current liabilities
4. Deposits-
The breakdowns of deposits from credit entities and customers as of December 31, 2004, 2003 and 2002, by domicile and type are included in Notes 17 and 18.
As of December 31, 2004, 2003 and 2002, the time deposits, both domestic and international, (other than interbank deposits) in denominations of €73 thousand (approximately US$ 100 thousand) or more amounted to €50,107 million, €45,548 million and €51,059 million, respectively.
5. Short-Term Borrowings-
Under Spanish format and regulations, the information about “Short-Term borrowings” is not required as it is under S-X Regulations. Therefore this information is not disclosed in the preceding pages. The analysis of short-term borrowings is as follows. Securities sold under agreement to repurchase were secured by investment securities, mainly Spanish Treasury bills and other governmental securities secured securities.
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Additionally, as of December 31 2002, the “Short term borrowings” caption includes “Mortgage Bonds” amounting €7,483,991 thousand.
Bonds and subordinated debt
At December 31, 2004, 2003 and 2002, short-term borrowings include €21,050,740 thousand, €17,994,695 thousand and €16,619,199 thousand, respectively, of securities sold under agreements to repurchase from Bank of Spain and other Spanish and foreign financial Institutions.
Terms of the securities sold under agreements to repurchase that compose the balance at December 31, 2004, are as follows:
Under 3 months
3 to 12 months
12 months to 5 years
5 to 10 years
Over 10 years
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A breakdown of securities sold under agreements to repurchase by type of security at December 31, 2004, 2003 and 2002, is as follows:
Spanish Treasury Bills and Notes
Securities of, or Guaranteed by, the Spanish Government
Other investment securities
6. Long Term Debt-
See Notes 19 and 21.
7. Minority Interest In Consolidated Subsidiaries
The details of minority interest as of December 31, 2004, 2003 and 2002 including preferred stock, and variations for the years then ended are included in Note 22.
In accordance with the Reg S-X.T. Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered, BBVA Preferred Capital, Ltd., BBVA Capital Funding Ltd, BBVA International Limited, BBVA Capital Finance, S.A and BBVA Privanza International (Gibraltar), Ltd.—issuers of registered preference shares guaranteed by BBVA, S.A.—do not file the financial statements required for a registrant by Regulation S-X as:
The financial statements of BBVA Privanza International (Gibraltar), Ltd., BBVA Preferred Capital Ltd, BBVA Capital Funding, BBVA International Limited and BBVA Capital Finance, S.A. are the following:
BBVA PREFERRED CAPITAL LTD
BALANCE SHEET
ASSETS:
Cash and cash equivalents
Loans to Parents
LIABILITIES:
Preference Shares
Other accrual accounts
SHAREHOLDER’S EQUITY:
Common stock
Total liabilities and Shareholder’s equity
INCOME STATEMENT
Dividends paid to Preference Shareholder
Financial Margin
Fees and commissions paid
Net income available to ordinary changes shareholder
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BBVA CAPITAL FUNDING LIMITED
Long Term Assets due from Parent
Short Term Assets due from Parent
Accrued interest receivable from Parent
Non-cumulative Guaranteed Non-voting Euro Preference Shares
Long Term - Euro Medium Term Notes
Short Term - Euro Medium Term Notes
Accrued interest payable to noteholders
Other accounts payable
Total liabilities and shareholder’s equity
Interest income from Parent
Net gains and losses arisen in foreign currency transactions
Interest expense to noteholders
Financial margin
Dividends paid or declared
BBVA INTERNATIONAL LIMITED
Assets due from Parent
Preferred shares
SHAREHOLDER’S EQUITY
Ordinary shares
Net gains (losses) arisen in foreign currency transactions
BBVA CAPITAL FINANCE, S.A.UNIPERSONAL
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BBVA PRIVANZA INTERNATIONAL (GIBRALTAR) LIMITED
Loans and advances to banks
Tangible fixed assets
Prepayments and accrued income
Amounts owed to customers
Accruals and deferred income
Called up share capital
Share premium account
Capital redemption reserve
Foreign exchange equalization reserve
Profit and loss account
Interest receivable
Interest payable
Fees and commissions receivable
Fees and commissions payable
Dealing (losses) / profits
Administrative expenses
Provisions for bad and doubtful debts
Taxation
Profit on ordinary activities after tax
Loss retained for the financial year
8. Derivative Financial Instruments-
The breakdown of the Derivative Financial Instruments under Spanish GAAP is shown in Note 26. See also Note 32.2.B.11 for the additional disclosures required under SFAS 133.
9. Pension liabilities-
See Note 3-j for a detail of the pension commitments under Spanish GAAP. Additional disclosures and the reconciliation to U.S. GAAP is shown in Note 32.2.B.4.
10. Disclosures About Fair Value Of Financial Instruments (SFAS 107)-
As required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments, (“SFAS No. 107”) the Group presents estimate fair value information about financial instruments for which it is practicable to estimate that value. Fair value of a financial instrument is the amount for which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flow or other valuation techniques. As a result, the Group’s ability to actually realize these derived values cannot be assured.
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The estimated fair values disclosed under SFAS No. 107 may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. SFAS No. 107 excludes disclosure of goodwill, core deposits, nonfinancial assets such as fixed assets as well as certain financial instruments such as investments in affiliated companies.
Accordingly, the aggregate estimate fair values presented do not represent the underlying value of the Group. The actual carrying amounts and estimated fair values of the BBVA Group’s financial instruments as of December 31, 2004, 2003 and 2002, are as follows:
Interest-bearing deposits
Available for sale and held to maturity investments
Noninterest bearing deposits
The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments for which it is practicable to estimate such value:
a) Cash and due from banks
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
b) Interest-bearing deposits in other banks and securities purchased under agreement to resell
The fair value represents the present value of estimated future cash flows discounted at the average year-end market rates for each type of instrument.
c) Investment securities
c.1) Fixed income:
(i) Listed securities: at closing market prices as of December 31, 2004, 2003 and 2002.
(ii) Unlisted securities: on the basis of market prices of other listed fixed-income securities of similar interest rate, credit risk and maturity. If no similar listed fixed-income securities can be identified, the fair value is
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estimated by discounting future cash-flows using year-end rates based on market rates available on securities with similar credit and maturity characteristics.
c.2) Equity securities:
(i) Listed securities with less than 3% ownership: fair values are based on the 2004, 2003 and 2002 closing market price.
(ii) Unlisted securities: at underlying book value per the December 31, 2004, 2003 and 2002 financial statements of each investee, or otherwise based on the latest financial statements currently available.
d) Loans and leases
The fair value of the Group’s loan portfolio is based on the credit and interest rate characteristics of the individual loans within each sector of the portfolio. The fair value of loans was estimated by discounting scheduled cash flows through the estimated maturity using prevailing market rates at year-end, and is implemented as follows:
d.1) The estimate of the provision for probable loan losses includes consideration of risk premiums applicable to various types of loans based on factors such as the current situation of the economic sector in which each borrower operates, the economic situation of each borrower and guarantees obtained. Accordingly, the allowance for probable loan losses is considered a reasonable estimate of the discount required to reflect the impact of credit risk.
d.2) For fixed and floating-rate loans for which the interest rate was similar to the average rates available for each type of loan (such as commercial or mortgage loans) as of December 31, 2004, 2003 and 2002, the carrying amount, net of the related allowance for probable loan losses, is considered a reasonable estimate of fair value.
d.3) For the remaining loans which the Group determined were at rates different to those currently offered, the fair values are estimated as the present value of future cash flows discounted at the average year-end market interest rates at which similar loans are being granted to borrowers with similar credit ratings and remaining maturities.
e) Deposits and Short Term Borrowings
f) Long-Term Debt
The fair value is estimated on the basis of the discounted present value of the cash flows over the remaining term of such debt. The discount rates were determined based on market rates available as of December 31, 2004, 2003 and 2002 on debt with similar credit and maturity characteristics of the Group’s.
g) Commitments and Contingencies
g.1) Guarantees and other sureties provided and documentary credits:
It is estimated that the differential, if any, between the fee charged by the Group for these transactions and the average year-end market fee would not give rise to a material difference.
g.2) Derivative Products:
The fair value of these products as of December 31, 2004, 2003 and 2002, considering the related discounted cash-flows and the year-end prevailing rates and market values is presented in Note 26.
11. Segment Information-
SFAS 131, Disclosures about segment of an enterprise and related information requires some disclosures of the financial statements relating to operating segments of a public business enterprise.
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This structure of areas is in line with the internal organization established to manage and monitor the businesses in the BBVA Group during the year 2004. The balances for the financial years 2003 and 2002, which are presented for comparative purposes, were drawn up following the same criteria.
The business areas contribution to net attributable profit and total assets are shown in the following tables:
Business Area contribution to net attributable profit
Retail Banking
Banking in América
Corporate Activities and others
Net Attributable profit
Business Area contribution to total assets
Wholesale and investment Banking
Corporate Activities
Total assets for reportable segments
Intearea Positions
Consolidated total assets
The differences between “Total Assets for Reportable Segments” and “Consolidated Total Assets” are due to the following reasons:
The accounting policies of the segments are principally the same as those described in Note 3. The accounting structure has been adjusted to the management structure, through the corresponding internal adjustments. Operating costs are divided among all the business areas in accordance with the scales that measure their distribution on the basis of the nature of the spending and consumption variables. This is also applied to ordinary corporate cost. The business areas are not affected by corporate decisions, such as the treatment of goodwill generated in investment or the constitution of extraordinary provisions.
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Liquid assets
Inter-area positions
Deposits and debt securities
Income for the period
Equity assigned
• Shareholders’ funds
• Other eligible funds
Liquid liabilities
TOTAL LIABILITIES
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(Millions of Euros)
General expenses
Other operating revenues and expenses
OPERATING INCOME
Net income from companies carried by the equity method
Amortization of Goodwill in consolidation
Net loan Loss provisions
Extraordinary items (net) and other
PRE - TAX PROFIT
Corporate income tax
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