Banco Bilbao Vizcaya Argentaria - 20-F annual report

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

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Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

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If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

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     The terms below are used as follows throughout this Annual Report:

     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.

     Other important factors that could cause actual results to differ materially from those in forward-looking statements include, among others:

     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.

     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 “€” and “euro” refer to Euro.

     “Latin America” refers to the countries in which we operate in South America, Central America and Mexico.

     Unless otherwise indicated, the financial information included in this Annual Report with respect to 2003 has been derived from financial statements that have been prepared in accordance with generally accepted accounting principles which were in effect during such year for banks in Spain, which include the accounting requirements established by the Bank of Spain (“Spanish GAAP”).

     Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of 19 July 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 EU-IFRS. The Bank of Spain issued Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats (the “Circular” or “Circular 4/2004”), which requires Spanish credit institutions to adapt their accounting system to the principles derived from the adoption by the European Union of EU-IFRS. Therefore, the Group is required to prepare its Consolidated Financial Statements for the year ended December 31, 2007 (together with comparative financial information for the years ended December 31, 2006, 2005 and 2004) in conformity with the EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004.

     Under EU-IFRS financial institutions that have entity specific historical loss experience should evaluate impairment in future cash flows in a group of financial assets on the basis of such historical loss experience for assets with similar credit risk characteristics. The Group has entity specific historical loss experience. In applying the EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 in our consolidated financial statements we must follow the methodology developed by the Bank of Spain in relation to allowances for loan losses based on historical statistical data relating to the entire Spanish financial system (peer group) until such time as the Bank of Spain has reviewed and verified our internal risk models (see Note 2.2.2.c). The Bank of Spain has allowed us to use our internal risk models with respect to a portion of the loan portfolio of our wholly-owned Mexican subsidiary, Bancomer, and subsidiaries in United States. Once the Bank of Spain has completed its review and verification and considered whether our historical information is adequate, we expect to be allowed to use our internal models for our entire loan portfolio, but we cannot predict whether the Bank of Spain will require any modifications to such models.

     Consistent with our past practice, we use our internal risk models for generally accepted accounting principles in the United States (“U.S. GAAP”) purposes. As a result, there is an adjustment in the reconciliation to U.S. GAAP in order to reflect in net income the reversal of the provisions recorded in each year and in stockholders’ equity the excess of the accumulated allowance for loan losses caused by the use of peer data as opposed to entity specific historical loss experience. Note 63.A.7 to our Consolidated Financial Statements provides additional information about this reconciliation.

     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 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 63 to the Consolidated Financial Statements.

     The BBVA Group implemented a new organizational structure during 2007, which affects the comparability of financial information included in this Annual Report on Form 20-F. During 2006 and for purposes of the consolidated financial statements included in BBVA’s annual report on Form 20-F for the year ended December 31, 2006 as

amended (the “2006 20-F/A”), BBVA’s organizational structure was divided into the following business areas (the “2006 Business Segments”): Retail Banking in Spain and Portugal; Wholesale Businesses; Mexico and the United States; South America; and Corporate Activities. On December 19, 2006, BBVA’s Board of Directors approved a new organizational structure for the BBVA Group, which has been implemented since the beginning of 2007 and is the basis for the consolidated financial statements included herein (the “2007 Business Segments”): Spain and Portugal; Global Businesses; Mexico and the United States; South America; and Corporate Activities. As part of the reorganization from the 2006 Business Segments to the 2007 Business Segments, the Business Banking, Corporate Banking and Institutional Banking units were included in the Spain and Portugal area and the Asset Management unit was included in the Global Business area. The financial information for our business areas for 2007, 2006 and 2005 presented in this Annual Report on Form 20-F have been prepared on a uniform basis, consistent with our organizational structure in 2007 in order to provide a year-on-year comparison. Due to the adoption of the new organizational structure, BBVA’s financial information by business area included in this Annual Report on Form 20-F is not directly comparable to its financial information by business area included in the 2006 20-F.

     The management of our business during 2007 along five segmental lines is discussed in “Item 4. Information on the Company” and each area’s 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. In addition, information regarding period-to-period changes is based on numbers which have not been rounded.

     The following principles should be noted in reviewing the statistical and financial information contained herein:

     Not Applicable.

     Not Applicable.

     Not Applicable.

     Not Applicable.

     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 63 of the Consolidated Financial Statements for a presentation of our stockholders’ equity and net income reconciled to U.S. GAAP.

     Spain’s currency is the euro. Unless otherwise indicated, the 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 (“ECB”) on December 31 of the relevant year.

     For convenience in the analysis of the information, the following tables describe, for the periods and dates indicated, information concerning the noon buying rate for euro, expressed in dollars per €1.00. 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 noon buying rate for euro from the Federal Reserve Bank of New York, expressed in dollars per €1.00, on March 27, 2008, was $1.5798.

     As of December 31, 2007, approximately 34% of our assets and approximately 40% of our liabilities were denominated in currencies other than euro (see Note 2.2.5 to our Consolidated Financial Statements).

     For a discussion of our foreign currency exposure, please see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Market Risk in Non-Trading Activities in 2007—Exchange Rate Risk”.

     Not Applicable.

     Not Applicable.

     We historically have developed our lending business in Spain, which continues to be our main place of business. As of December 31, 2007, business activity in Spain accounted for 64.7% of our loan portfolio. See “Item 4. Information on the Company—Selected Statistical Information—Loans by Geographic Area”. The Spanish economy has grown rapidly in recent years, with Spanish gross domestic product growing by 3.9% and 3.6% in 2006 and 2005, respectively, according to Bank of Spain. Spanish GDP grew more slowly in 2007, at 3.8%, and is expected to grow at lower rates in 2008 and 2009. Given the concentration of our loan portfolio in Spain, 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, results of operations and cash flows.

       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-size 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 loan portfolio to these customer segments in the event of additional adverse developments in the economy.

     The sound economic growth, the strength of the labor market and a decrease in interest rates in Spain caused an increase in the demand for mortgage loans in the last few years. This has had repercussions in housing prices, which rose significantly. After this buoyant period, demand started adjusting a year and a half ago. Over the past few months supply has adjusted more sharply in the residential market in Spain, falling in line with demand. In the next few quarters, housing supply and demand should adjust further, in particular if the current financial situation continues. In addition, in countries where the housing markets have been booming, the ongoing adjustment may intensify. As residential mortgages are one of our main assets, comprising 26%, 26% and 27% of our loan portfolio at December 31, 2007, 2006 and 2005, respectively, we are currently highly exposed to developments in real estate markets. We expect the worsening financial conditions and the deterioration of the economic activity already underway in Spain to cause a gradual adjustment process in the Spanish real estate sector. As a result, housing prices should continue to slow down or they could decline. Adverse changes in the Spanish real estate sector could have a significant impact on our loan portfolio and, as a result, on our financial condition and results of operations.

     In addition, a strong increase in interest rates or unemployment in Spain might have a significant negative impact on the mortgage payment delinquency rate, which is already deteriorating. For example, in 2007 in our Spain and Portugal business area our non-performing loan, or NPL, ratio increased 18 basis points to 0.73% as of December 31, 2007 from 0.55% as of December 31, 2006, our write-offs nearly doubled, to €394 million in 2007 from €191 million in 2006, and our coverage ratio declined to 231% as of December 31, 2007 from 316% as of December 31, 2006. An increase in delinquency rates on the non-performing loan portfolio generally or in respect of a business area could have an adverse effect on our business, financial condition, results of operations and cash flow.

     Spanish households and businesses 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 makes debt service on such loans more vulnerable to changes in interest rates than in the past. In fact, the debt burden of the Spanish households on disposable income has increased substantially from 12.6% in 2003 to 17.2% in 2007. The increase in households’ and businesses’ indebtedness also limits their ability to incur additional debt; decreasing the number of new products we may otherwise be able to sell them.

     Historically, one of our principal sources of funds has been savings and demand deposits. Time deposits represented 26.7%, 23.3% and 25.4% of our total funding at December 31, 2007, 2006 and 2005, 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. The liquidity crisis triggered by the United States subprime market has turned out to be deeper and more persistent than expected. Central banks’ interventions have had a limited effect so far. New issuances in wholesale markets have been scarce, expensive and restricted to a few countries, and the interbank markets are dried up. In this context, we cannot assure you that we will be able to maintain our current levels of funding without incurring higher funding costs or having to liquidate certain of our assets.

     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. In addition, the trend towards consolidation in the banking industry has created larger and stronger banks with which we must now compete. This is particularly the case of the consumer credit market, where foreign entrants are operating in the segment of small credits to subprime households.

     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 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 the EU and 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 74% of our loan 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.

     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 EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004, which differs in certain respects from U.S. GAAP, the financial reporting standard to which many investors in the United States may be more accustomed. See Note 63 of the Consolidated Financial Statements for the presentation of our stockholders’ equity and net income reconciled to U.S. GAAP.

     Our commitments with personnel which are considered to be wholly unfunded are recognized under the heading “Provisions—Funds for Pensions and Similar Obligations” in the accompanying consolidated balance sheets. These amounts include “Post-employment benefits”, “Early Retirements” and “Post-employment welfare benefits”, which amounted to €2,648 million, €2,950 million and €234 million, respectively, as of December 31, 2007 (€2,817 million, €3,186 million and €223 million, respectively, as of December 31, 2006). These amounts are considered wholly unfunded due to the absence of qualifying plan assets.

     We face liquidity risk in connection with our ability to make payments on these unfunded amounts which we seek to mitigate, with respect to “Post-employment benefits”, by maintaining insurance contracts which were contracted with insurance companies owned by the Group. The insurance companies have recorded in their balance sheets specific assets (fixed interest deposit and bonds) assigned to the funding of these commitments. The insurance companies also manage derivatives (primarily swaps) to mitigate the interest rate risk in connection with the payments of these commitments. We seek to mitigate liquidity risk with respect to “Early Retirements” and “Post-employment welfare benefits” through oversight by the Group’s Assets and Liabilities Committee (“ALCO”). The Group’s ALCO manages a specific asset portfolio to mitigate the liquidity risk regarding the payments of these commitments. These assets are government and cover bonds (AAA/AA rated) which are issued at fixed interest rates with maturities matching the aforementioned commitments. The Group’s ALCO also manages derivatives (primarily swaps) to mitigate the interest rate risk in connection with the payments of these commitments.

     The success of the Compass acquisition will depend, in part, on BBVA’s ability to realize the anticipated benefits from combining the businesses of BBVA and Compass. However, to realize these anticipated benefits, BBVA and Compass must successfully combine their businesses, which are currently principally conducted in different countries by management and employees coming from different cultural backgrounds. If BBVA is not able to achieve these objectives, the anticipated benefits of the transaction may not be realized fully or at all or may take longer to realize than expected.

     It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the ability of BBVA and Compass to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the transaction. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of Compass and BBVA during the transition period and on the combined company.

     See “Item 4. Information on the Company—Business Overview—Mexico and the United States”.

     Approximately 31% of our income attributed to the Group in 2007 was generated in Mexico. We face several types of risks in Mexico which could adversely affect our banking operations in Mexico or the Group as a whole.

     First, the mortgage and especially the consumer loan portfolio could start showing higher delinquency rates if there is a persistent increase in unemployment rates, which could arise if there is a more pronounced slowdown in the United States.

     Second, price regulation and competition could squeeze the profitability of our Mexican subsidiary. For example, in order to increase competition and to deepen credit, Mexican financial regulators could elect to introduce price distortions not linked to the true risk premium. In this occurred, the market share of our Mexican subsidiary could decrease given its risk selection standards.

     Finally, political instability or social unrest could weigh on the economic outlook, which could increase economic uncertainty and capital outflows.

     Any of these risks or other adverse developments in laws, regulations, public polices or otherwise in Mexico may adversely affect the business, financial condition, operating results and cash flows of our Mexican subsidiary or the Group as a whole.

     The Latin American countries in which we operate have experienced significant economic volatility in recent decades, characterized by slow growth, declining investment and significant inflation. In particular, the high inflation rates registered in the area during the last few months have become a serious concern. 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 what we believe to be conservative risk policies and the area is proving to be resilient to current market turbulence, 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.

     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, operating results and cash flows of our subsidiaries in Latin America. In particular, the current international financial crisis could end up having a negative impact on Latin American markets, especially via the real channel if the United States deceleration continues.

     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 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.

     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, particularly in Venezuela. 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, results of operations and cash flows.

     The BBVA Group formed a strategic alliance in the Chinese market with the CITIC Group in 2006. In March 2007, in accordance with this agreement the Group acquired 4.83% of China Citic Bank (CNCB) as well as 14.58% ownership interest in CITIC International Financial Holdings (CIFH). See “Item 4. Information on the Company—Business Overview—Wholesale Businesses”.

     As a result of our expansion into Asia, we are exposed to increased risks relating to emerging markets in the region, particularly in China. The Chinese government has exercised, and continues to exercise, significant influence over the Chinese economy. Chinese governmental actions concerning the economy and state-owned enterprises could have a significant effect on Chinese private sector entities in general, and on CNCB or CIFH in particular.

     We also are exposed to regulatory uncertainty and geopolitical risk as a result of our investments in Asia. Changes in laws or regulations or in the interpretation of existing laws or regulations, whether caused by a change in government or otherwise, could adversely affect our investments. Moreover, Asian economies can be directly and negatively affected by adverse developments in other countries in the region and beyond.

     Any of these developments could have a material adverse effect on our investments in Asia or the business, financial condition, operating results and cash flows of the Group.

     The Group’s expansion continued in the United States in 2007 with the acquisition of Compass and State National Bancshares, Inc. (“State National Bancshares”). See “Item 4. Information on the Company—Business Overview—Mexico and the United States” and “Item 4. Information on the Company—History and Development of the Company—Capital Expenditures”.

     Our expansion in the United States makes us more vulnerable to developments in this market, particularly the real estate market. The sound economic growth, the strength of the labor market and a decrease in interest rates in the United States caused an increase in the demand for mortgage loans in the last few years. This had repercussions in housing prices, which also rose significantly. Last summer, the difficulties experienced by the subprime mortgage market triggered a real estate and financial crisis, which is still ongoing and which has resulted in significant volatility and uncertainty in financial and other markets around the world as major commercial and investment banks made substantial provisions in 2007 against their holdings of subprime debt and related collateralized debt obligations. As we have acquired entities in the United States, our exposure to the U.S. market has increased. Adverse changes to the U.S. economy in general, or the U.S. real estate market in particular, including changes in such markets which negatively affect other markets and economies around the world, or adverse changes in the U.S. or global financial markets whether resulting from the difficulties experienced by the subprime market or otherwise, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

     Our legal name is Banco Bilbao Vizcaya Argentaria, S.A. BBVA’s predecessor bank, BBV, was incorporated in Spain 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 +34-91-3746201. BBVA’s agent in the U.S. for U.S. federal securities law purposes is Jose Maria Garcia Meyer (15 South 20th Street, Birmingham, AL 35233, telephone number +1(205)297-3000 and fax number +1(205)297-3116). BBVA is incorporated for an unlimited term.

     On March 5, 2008, we announced the sale of our 5.01% interest in the brazilian bank, Banco Bradesco, S.A. (“Bradesco”) to Bradesco’s principal shareholders, Cidade de Deus — Companhia Comercial de Participaçoes and Fundaçao Bradesco, for an approximate market price of €976 million, with a resulting gain to us of approximately €720 million.

     On December 28, 2007, we reached an agreemente to sell the businesses in our branch in Miami to Banco Sabadell, S.A. We expect to close this branch in the first half of 2008.

     Our principal investments are financial: subsidiaries and affiliates. The main capital expenditures from 2005 to the date of this Annual Report were the following:

     On February 16, 2007 BBVA entered into a definitive agreement to acquire 100% of the shares capital of Compass Bancshares, Inc. (“Compass”), an American banking group listed on NASDAQ, which conducts its main business activity in Alabama, Texas, Florida, Arizona, Colorado and New Mexico. On September 7, 2007, after obtaining the mandatory authorizations, the Group acquired 100% of the share capital of Compass. The consideration paid to former Compass stockholders for the acquisition was $9,115 million (€6,672 million). The Group paid $4,612 million (€3,385 million) in cash and delivered 196 million of newly-issued shares.

     In September 2007, the Group increased its ownership interest in Metropolitan Participations, S.L. to 40.67%, with an investment of €142 million euros.

     On January 3, 2007, pursuant to the agreement entered into on June 12, 2006, and after obtaining the mandatory authorizations, the Group closed the transaction to purchase State National Bancshares Inc., an American banking group based in Texas, with an investment of $488 million (€378 million).

     On December 22, 2006, BBVA reached an agreement with CITIC Group, a Chinese banking group, to develop a strategic alliance in the Chinese market. In March 2007, in accordance with this agreement the Group acquired 4.83% of China Citic Bank (CNCB) with an investment of €719 million. The Group also maintains a purchase option that permits us to acquire up to 9.9% of the capital of the bank. Additionally BBVA acquired a 14.58% ownership interest in CITIC International Financial Holdings (CIFH), a banking entity headquartered in Hong Kong and is listed on the Hong Kong Stock Exchange. The price for this ownership interest was €483 million.

     On November 30, 2006 the Group acquired all the shares of Maggiore Fleet S.p.A., an Italian vehicle rental company, for €70.2 million. Goodwill of €35.7 million arose from this acquisition.

     On November 10, 2006, pursuant to the agreement entered into on June 12, 2006 and after obtaining the mandatory authorizations, the Group acquired Texas Regional Bancshares through the investment of $2,141 million (€1,674 million). The goodwill recognized as of December 31, 2006 amounted to €1,257 million.

     On July 28, 2006, BBVA acquired 100 % ownership of Uno-E Bank, S.A. The process to acquire all of Uno-E Bank S.A.’s shares commenced on January 10, 2003 when Telefónica España, S.A., pursuant to the agreement entered into by Terra Networks, S.A. (subsequently merged into Telefónica España, S.A.) and BBVA, proceeded on January 10, 2003 to start selling to BBVA its 33 % ownership interest in Uno-E Bank, S.A. for an aggregated amount of €148.5 million.

     In May 2006, BBVA acquired a 51% ownership interest in Forum, a Chilean company specializing in car purchase financing, through the Chilean entities Forum Distribuidora, S.A. and Forum Servicios Financieros, S.A. (which in turn own all the shares of ECASA, S.A.), giving rise to the incorporation of BBVA Financiamiento Automotriz. The goodwill recognized as of December 31, 2006 amounted to €51 million.

     On March 3, 2006, BBVA purchased 0.43% of BBVA Chile’s share capital for 2,318 million Chilean pesos (€3.7 million), increasing BBVA’s share capital in BBVA Chile to 67.05%. As the share capital of BBVA in BBVA Chile is higher than two thirds of BBVA Chile’s total share capital, BBVA, in compliance with Chilean legislation, launched a public tender offer for all of BBVA Chile’s share capital. The public tender offer was effective from April 3, 2006 to

May 2, 2006. After the acceptance of the public tender offer by 1.13% of BBVA Chile’s outstanding shares, BBVA’s share capital in BBVA Chile increased to 68.18%.

     On January 6, 2005, pursuant to the agreement entered into in September 2004 and after obtaining the mandatory authorizations, the Group, through BBVA Bancomer, S.A. de C.V. (“BBVA Bancomer”), acquired all the shares of Hipotecaria Nacional, S.A. de C.V., a Mexican company specializing in the mortgage business. The price paid was 4,121 million Mexican pesos (approximately €276 million) and the goodwill recognized amounted to €259 million at December 31, 2005.

     On April 28, 2005, pursuant to the agreement entered into on September 20, 2004 and after obtaining the mandatory authorizations, BBVA, acquired all the shares of LNB, an American bank holding company located in the State of Texas. It operates in the banking business through two independent banks: Laredo National Bank and South Texas National Bank. The price paid was $859.6 million (approximately €666 million) and the goodwill recognized amounted to €474 million at December 31, 2005.

     On October 31, 2005, the Guarantee Fund for Colombian Financial Institutions (“FOGAFIN”), sold by public auction 98.78% of the share capital of Banco Granahorrar, S.A. (a Colombian financial institution) (“Banco Granahorrar”) to the BBVA Group’s subsidiary in Colombia, BBVA Colombia, S.A. The offer made by BBVA Colombia, S.A. for the acquisition of Banco Granahorrar totaled $423.66 million. This transaction was consummated in December 2005 after the required authorizations had been obtained from the supervisory and control bodies. The price paid was 981,572.2 million Colombian pesos, approximately €364 million, and the goodwill recognized amounted to €267 million at December 31, 2005.

     Our principal divestitures are financial, in subsidiaries and in affiliates. The main capital divestitures from 2005 to the date of this Annual Report were the following:

     In February 2007, BBVA sold its 5.01% capital share in Iberdrola, S.A. This sale gave rise to a gain of €883 million.

     On June 14, 2006, BBVA sold its 5.04% capital share in Repsol YPF, S.A (“Repsol”). The selling procedure was executed through the closing and settlement of hedging equity swaps previously contracted. This sale gave rise to a gain of €523 million.

     On May 19, 2006, BBVA sold its ownership interest in the share capital of Banca Nazionale del Lavoro (“BNL”) to BNP Paribas, for a price of €1,299 million following its adhesion on May 12, 2006, as shareholder of BNL, to the public tender offer launched by BNP Paribas to acquire 100% of BNL’s capital. The sale gave rise to a gain of €568.3 million.

     On April 5, 2006, BBVA sold its ownership interest of 51% in the share capital of Banc Internacional d’Andorra, S.A. (“Andorra”) to the rest of the shareholders of the entity, the Andorran founding partners of the bank, for a price of €395.15 million.

     There were no significant capital divestures during 2005.

     On June 20, 2005, we launched an exchange offer for the approximately 85.3% of the shares of BNL which we did not already own. Under the terms of the exchange offer, BBVA offered one of its ordinary shares for every five ordinary shares of BNL. We withdrew our offer following a third party’s announcement that it had entered into certain agreements pursuant to which it controlled a 47% stake in BNL.

     On March 3, 2006, BBVA purchased 0.43% of BBVA Chile’s share capital for 2,318 million Chilean pesos (€3.7 million), increasing BBVA’s share capital in BBVA Chile to 67.05%. See “—Capital Expenditures”.

     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 investments in some of Spain’s leading companies.

     In 2007 the Group implemented a new organizational structure, which was designed to streamline the Group’s corporate structure and gave greater weight and autonomy to its business units. As part of this reorganization, the Business Banking, Corporate Banking and Institutional Banking units were included in the Spain and Portugal area and the Asset Management unit was included in the Global Business area. The Group focused its operations on five major business areas:

     The foregoing description of our business areas is consistent with our current internal organization. The financial information for our business areas for 2007, 2006 and 2005 presented below has been prepared on a uniform basis, consistent with our organizational structure in 2007. 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.

     The following table sets forth information relating to income attributed to the Group for each of our business areas for the years ended December 31, 2007, 2006 and 2005.

     The following table sets forth information relating to net interest income for each of our business areas for the years ended December 31, 2007, 2006 and 2005.

     The Spain and Portugal business area focuses on providing banking services and consumer finance to private individuals and businesses in Spain and Portugal.

     The business units included in the Spain and Portugal business area are:

     The principal figures relating to this business area as of December 31, 2007 and December 31, 2006 were:

     This business unit’s principal activities were focused on the following division:

     Customer lending by the Financial Services unit increased 12.3% to €123,330 million as of December 31, 2007 from €109,814 million as of December 31, 2006, principally due to strong growth in mortgage loans in the Financial Services for individuals unit, which increased 13.0% from December 31, 2006.

     Customer funds under management by the Financial Services unit increased 2.80% to €119,574 million as of December 31, 2007 from €116,313 million as of December 31, 2006, principally due to an increase in time deposits. Mutual and pension fund assets managed by the Financial Services unit decreased by 3.9% as of December 31, 2007 as compared to December 31, 2006.

     Financial Services for Individuals

     Within the sphere of financial products designed for individual customers, new segments have been targeted for offers of consumer loans with a pre-approved limit and available 24 hours a day (PIDE), and the range of mortgage loans has been extended with the Hipoteca BlueBBVA for young people, the Hipoteca Universal (Universal Mortgage) for inmigrants, the Hipoteca Cambio de Casa(Moving Home Mortgage), the Hipoteca Bienestar (home equity loan) for those aged over 65, theHipoteca Fácil Básica (Basic Easy Mortgage) and the Hipoteca Rentas Altas Básica (Basic High-Income Mortgage).

     In Financial Services for Individuals we have launched the following products: the twoQuincenas del Libretón (Passbook Fortnights), and the following time deposits: the Multidepósito BBVA, the Depósito Creciente (Growing Deposit) BBVA and the Depósito Extra, for attracting new funds.

     In this division, the brand “Dinero Express” specializes in the immigrant sector. In 2007 it extended its network to 130 outlets of which 33 are DUOs (sharing premises with BBVA).

     Financial Services for Small Businesses

     This segment consists of professional practices, the self-employed, retailers, the farming community and companies with a turnover of less than €2 million.

     Several campaigns have been launched for the small businesses segment, involving such innovative products as the Préstamo Flexible Negocios (Flexible Business Loan), the Cuenta de Crédito Triple Cero Plus (Triple Zero Plus Credit Account) and the Pack Negocios (Business Pack). The offer has been extended in risk hedging products (Stockpyme) and launch has been made ofSoluciones BBVA (non-financial services for SMEs). Furthermore, the Plan Comercios for retailers has included products such as the Cuenta Total Comercios (Comprehensive Retailers Account), theCuenta de Crédito Comercios Triple Cero (Triple Zero Retailers Credit Account), the Pack Negociosand the Compromiso de Calidad (Quality Commitment) for POS terminals. The farming sector has been catered for through the PAC Campaign and the launch of the new Depósito PAC.

     Consumer finance

     This unit manages online banking, consumer finance, credit cards and leasing plans. These activities are conducted by Uno-e, Finanzia and other companies in Spain, Portugal and Italy.

     The loan portfolio amounted to €5,539 million, an increase of 36.1% during the year to on invoicing of €5,368 million (up 28%). In the vehicle prescription business, sales of €1,944 million in the year increased the total stock to €3,070million (up 52%) despite a 6.0% drop in the registration of private cars. This boosted market share to 13.1% (up 166 basis points). Invoicing of equipment finance climbed 40% and the stock rose 46% to €805 million. Investment in equipment leasing plans increased 33% to €698 million. The unit has a centralised channel for minor office equipment. One of its products (Agiliza) increased 53% and the Vendor office network rose 34%. The fleet of vehicles in leasing plans with maintenance increased 9% to 38,979 units. At Uno-e lending increased 27% to €1,178 million and customer funds (managed or brokered) grew 11% to €1,669 million.

     Customer funds amounted to €1,669 million, an increase of 10.5% due to the increase in deposits related to the roll-out of Depósito 10 and Depósito 15.

     Key developments in this area included the purchase of Intesa Renting S.p.A., an Italian fleet management company.

     Corporate and Business Banking

     The corporate and business banking unit handles SMEs, large companies and institutions in Spanish domestic market through specialized networks. As of December 31, 2007, the loan portfolio had risen 11.0% to €72,588 million and customer funds were €29, 509 million (up 10.0%).

     Highlights within the sphere of this unit are the special finance line for SMEs Línea ICO PYME 2007, the enlargement of the product offer catering for risk hedging (Riskpyme), a new product for advancing the reimbursement of VAT, IGIC (Canary Islands) and Corporate Tax, as well as new formulas, such as operating renting, the factoring of subsidies, leasing with exemption of capitals, leasing with confirmed payment, multipurpose leasing operation with a balloon payment, real estate renting, or confirming associated with a real estate leasing.

     European Insurance

     Our European insurance activities are conducted through various insurance companies that provide direct insurance, reinsurance and insurance brokering services in Spain and Portugal and market products for different types of customers (private individuals, SMEs, retailers, professional service firms and providers and self-employed individuals) through this unit’s branch offices.

     Finally an agreement has been reached in European Insurance with the Spanish insurance company MAPFRE for the roll-out and marketing of car insurance, and new formats of Rentas Aseguradas (Guaranteed Incomes) have been launched within the Plan Mayores for senior citizens, as well as a new range of keyman insurance and repatriation insurance for inmigrants and non-residents.

     BBVA Portugal

     BBVA Portugal manages the banking business in Portugal. As of December 31, 2007, BBVA Portugal’s customer loans amounted to €5,056 million, an increase of 19.3% from €4,237 million in 2006. In 2007, mortgage lending was the most dynamic sector, with a 12.4% increase over 2006.

     As of December 31, 2007, customer funds managed by BBVA Portugal totaled €2,676 million, representing a 2.2% decrease over €2,737 million in 2006, principally due to the increase in mutual and pension fund assets under management by BBVA Portugal.

     The Global Businesses area focuses on providing services to large international companies and investment banking, capital markets and treasury management services to clients.

     The business units included in the Global Businesses area are:

     The principal figures relating to this business area as of December 31, 2007 and December 31, 2006 were:

     This unit combines the management of products of investment banking, and market unit, with services to large international companies. It also co-ordinates the corporate banking and markets business in Mexico and South America although its earnings are recorded under the corresponding areas.

     This business unit’s principal activities were focused on the following divisions:

     Global Markets has pursued a growth plan that has seen the opening of trading floors in Hong Kong and Düsseldorf and the Centro Regional de Derivados (Regional Derivatives Center) in Mexico, for the distribution of products in Asia, Europe and Latin America, respectively, as well as for generating products in those zones that might do business with the Group throughout the world. Launch has likewise been made of IRS Cuota Segura, a hedging product for mortgage repayments within a scenario of interest rate rises, and the range of hedging derivatives that the networks in Spain and Portugal offer their customers has been expanded (within the Riskpyme and Stockpyme projects), as has the product offering in commodities, inflation and alternative investment derivatives.

     This unit designs and manages the products that are marketed through the Group’s different branch networks. It also manages the high-net-worth segment of retail customers through BBVA Patrimonios and the international private banking unit.

     In Asset Management and Private Banking we have launched the following products: BBVA Capital Privado, private equity fund; Altitude Teide and BBVA Propiedad Global, hedge funds; new guaranteed mutual funds, both in equity, such as BBVA Europa Máximo and BBVA Garantizado 5 x 5 II, and in fixed-income; the BBVA Bolsa China (China Stock Market); five exchange-traded funds, in equity (Acción BBVA FTSE

Latibex Top ETF and Acción FTSE Latibex Brasil ETF), fixed-income (AFI Monetario Euro ETF and AFI Bonos Medio Plazo ETF), with the Ibex Top Dividendo as underlying; and, for private banking customers, the property investment firms Real Estate México I, II and III and a photovoltaic solar energy project in La Gineta (Albacete- Spain).

     This business unit also handles the Group’s real estate business, though Anida Group, as well as its private equity business.

     During 2007 the Business Projects unit was transformed into a venture capital manager operating under the Valanza brand, and began operations in Mexico.

     Finally, a sell-off has been made of the investment in Iberia and of part of the stock held in Gamesa, S.A. and Técnicas Reunidas, S.A. and a shareholding has been taken up in Occidental Hoteles Management, S.A., through the new risk capital fund PECR I.

customers as of December 31, 2007, a total loan book of €26,085 million and €25,411 million in deposits (of which €17,795 million in loans and €16,514 million in deposits corresponded to Compass Bank).

     The Group’s pensions and insurance business in Mexico and Puerto Rico generated net attributable profit of €170 million in 2007, an increase of 6.5% from 2006.

     The South America business area includes the banking, insurance and pension businesses of the Group in South America.

     The business units included in the South America business area are:

     The principal figures relating to this business area as of December 31, 2007 and December 31, 2006 were:

     Local currencies in South America fell against the euro in 2007, with a resulting negative impact on our consolidated financial statements as of and for the year ended December 31, 2007. See “Item 5. Operating and Financial Review and Prospects— Operating Results—Factors Affecting the Comparability of our Results of Operations and Financial Condition”.

     Economic conditions in all the region’s countries were favorable, which provided for substantially improved key variables in the Latin-American financial-services industry, most notably profitability and solvency.

     The following is a brief description of our operations, on a country-by-country basis, in the South America business area. The operating results described below refer to each individual unit’s contribution to the South America business area’s operating results, unless otherwise stated.

     BBVA Banco Francés in Argentina obtained income attributed to the Group of €147 million an increase of 19.7% from €136 million in 2006.

     The new products launched by BBVA Banco Francés in Argentina include, among others, the deposit Plazo Fijo Renta Asegurada (Fixed-Term Guaranteed Income), the Visa Platinum card, MasterCard Black for the high-income bracket, the offer of loans through ATMs, the creation of theBlue segment (with cards and other benefits for young people) or the adoption of the Riskpyme model, which will make treasury and derivatives products available to customers.

     BBVA Chile’s income attributed to the Group for 2007 amounted to €37 million compared to €7 million in 2006, due to commercial activity.

     BBVA Chile has continued to expand its BBVA Express branch network and, through Forum, an entity devoted to vehicle finance acquired in 2006, it has extended its lending offer in this segment.

     BBVA Colombia’s income attributed to the Group for 2007 amounted to €107 million an increase of 7.3% from 96 million in 2006, due to higher taxes in 2006.

     BBVA Colombia has launched Generación XXI, a program for young people, and new loans for car purchases that finance 100% of the amount over 76 months in 12 or 14 installments per year.

     BBVA Panama’s income attributed to the Group for 2007 amounted to €23 million from €22 million in 2006.

     BBVA Paraguay’s income attributed to the Group for 2007 amounted to €18 million an increase of 25.5% from €14 million in 2006.

     BBVA Banco Continental’s income attributed to the Group for 2007 was €63 million, an increase of 17.2% from €56 million in 2006.

     BBVA Banco Continental in Peru has subscribed an agreement with the IFC (World Bank) for financing mortgages and SMEs and receives funding from the IDB in support of the housing sector. It has launched a new payment system for online shopping and has begun to market hedge derivatives for SMEs (Riskempresa).

     BBVA Uruguay’s income attributed to the Group for 2007 decreased 23.9% to €6 million from €8 million in 2006.

     BBVA Banco Provincial’s income attributed to the Group for 2007 increased 65.2% to €124 million from €82 million in 2006.

     BBVA Banco Provincial experienced a year fraught with political and regulatory uncertainty. The lending portfolio was diversified to prioritize the retail business, particularly consumer lending and credit cards with products such as the Instant Payroll Loan, which was a first consumer finance product of this type offered in Venezuela.

     Banco Provincial in Venezuela has also rolled out the Blue Program for young people and new lines of instant finance through credit cards and for companies via e-banking.

     The pension and insurance unit in South America achieved an income attributed of €125 million in 2007. This was 21.8% up on the previous year. Of this figure, €73 million were generated in the pension business (up 12.9 against 2006) and €52 million came from the insurance business (up 36.7%).

     The year has been characterized by intensive marketing activity, including the design of new products, the reinforcement of alternative sales channels and the search for opportunities in new markets. This has all taken place within a changing regulatory environment, especially in the pension business. In the fourth quarter of 2007 the Group has sold its stakes in AFP Crecer and BBVA Seguros, both in the Dominican Republic.

     The Corporate Activities area handles the Group’s general management functions. These mainly consist of structural positions for interest rates associated with the euro balance sheet and exchange rates, together with liquidity management and shareholders’ funds.

     The business units included in the Corporate Activities business area are:

     The ALCO manages the BBVA Group’s overall financing needs and interest and exchange rate risks. ALCO also manages the BBVA Group’s investments and capital resources in an effort to improve the return on capital for our shareholders.

     The Holdings in Industrial and Financial Companies business unit manages the Group’s holdings in listed industrial companies, principally Telefónica, S.A., and until Februay 2007, Iberdrola, S.A. All of these shareholdings are recorded on our consolidated balance sheet prepared in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 as “available-for-sale”. As of December 31, 2007, the portfolio of shareholdings of

this business unit had a market value (including equity swaps) of €7,104 million. In 2007, the BBVA Group’s holdings in industrial and financial companies generated unrealised gains of €4,013 million before taxes, compared to €3,389 million in 2006.

     The Spanish government traditionally has been closely involved with the Spanish banking system, both as a direct participant through its ownership of the Instituto de Crédito Oficial(“ICO”) and as a regulator retaining an important role in the regulation and supervision of financial institutions.

     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”.

     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 Eurosystem, 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:

     The Fondo de Garantía de Depósitos en Establecimientos Bancarios (“FGD”), which operates under the guidance of the Bank of Spain, guarantees both bank and securities deposits up to €20,000 per customer for each

type of deposit, 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 2006 was 0.06% of the year-end amount of bank deposits to which the guarantee extended and 0.06% over the 5% of the securities held on clients’ behalf, in accordance with legislation in effect. 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, 2007, all of the Spanish banks belonging to the BBVA Group were members of the FGD and thus obligated to make annual contributions to it.

     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.

     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.

     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 were revised in 1985 and, pursuant to EU directives, amended as of January 1, 1993. Those requirements are applicable to BBVA Group on both a consolidated and individual basis. Another and outstanding revision is about to finalize to adopt Basel II.

     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:

     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”.

     The Basel Committee on Banking Supervision (the “Basel Committee”), which includes the supervisory authorities of thirteen major industrial countries, has adopted an international framework (the “Basel Accord”) for capital measurement and capital standards of banking institutions. The framework provides:

     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 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, mainly in countries outside the EU. 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.

     The Basel Committee published a new Basel capital accord (also known as Basel II) which has replaced the Basel Accord. A new regulatory framework (Directives 2006/48/EC and 2006/49/EC) was adopted in June 2006.

     Royal Decree 216/2008, of 15 February, on capital of financial institutions was published on 16 February 2008. Also, a series of amendments were introduced to Law 13/1985, of 25 May, on investment ratios, capital and reporting requirements of financial intermediaries. The main purpose of these new regulations is to transpose into Spanish law Directive 2006/48/EC and Directive 2006/49/EC which, in turn, transpose into Community law the New Basel Capital Accord (Basel II).

     Accordingly, in 2008 the Bank must calculate its capital requirements in accordance with the aforementioned regulations, which change the way entities must calculate their minimum capital, include new risks that require the use of capital, such as operational risk, and introduce new calculation methodologies and models to be applied by the

entities, and new requirements in the form of validation mechanisms and public information to be disclosed to the market.

     The BBVA Group is performing the necessary adaptations to its policies and processes in order to comply with the aforementioned regulations. In this respect, within the framework of the adaptation to Basel II carried out in recent years, advanced management tools are being implemented for risk measurement (scoring systems, transaction monitoring, Value at Risk (VaR), operational risk measurement, inter alia) which include, as a fundamental variable of the models, the analysis of capital requirements and the impacts of the decisions taken by the Group. In any case, the Bank’s directors consider that the impact of the entry into force of the aforementioned legislation will not be material.

     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.

     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 non-consolidated companies of the economic Group) of a bank’s or group’s regulatory capital.

     We are subject to the legal and other restricted reserves requirements applicable to Spanish companies. Please see “—Capital Adequacy Requirements”. See Note 34 to the Consolidated Financial Statements.

     For a discussion of the Bank of Spain regulations relating to allowances for loan losses and country risk, see “—Selected Statistical Information—Assets—Loan Loss Reserve”.

     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.

     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 2.2.4 and Note 27 to the Consolidated Financial Statements.

     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, 2007, we had approximately €3.5 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.

     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.

     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 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.

     Banking Regulation

     BBVA is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHC Act”). As such it is subject to the regulation and supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Among other things, the Group’s direct and indirect activities and investments in the United States are limited to those that are ‘financial in nature’ or ‘incidental’ or ‘complementary’ to a financial activity, as determined by the Federal Reserve. BBVA is also required to obtain the prior approval of the Federal Reserve before acquiring, directly or indirectly, the ownership or control of more than 5% of any class of voting stock of any U.S. bank or bank holding company.

     Under current Federal Reserve policy, BBVA is required to act as a source of financial strength for its U.S. bank subsidiaries. Among other things, this source of strength obligation could require BBVA to inject capital into any of its U.S. bank subsidiaries if any of them became undercapitalized.

     The Group’s U.S. bank subsidiaries and BBVA’s U.S. branches are also subject to supervision and regulation by a variety of other U.S. regulatory agencies. In addition to supervision by the Federal Reserve, BBVA’s New York and Miami branches are supervised by the New York State Banking Department and the Florida Office of Financial Regulation, respectively. Compass Bancshares Inc. is a financial holding company within the meaning of the BHC Act and is subject to supervision and regulation by the Federal Reserve. Compass Bank and Texas State Bank are state-chartered banks that are members of the Federal Reserve System and are supervised by the Federal Reserve and, respectively, the State of Alabama Banking Department and the Texas Department of Banking. Compass Bank also has branches in Texas, Arizona, Florida, Colorado, and New Mexico, which are supervised by their respective state banking regulators. Laredo National Bank is chartered as a national bank and is supervised by the Office of the Comptroller of the Currency. BBVA Bancomer USA and BBVA Puerto Rico are chartered and supervised by the State of California Department of Financial Institutions and the Officina del Comisionado de Instituciones Financieras de Puerto Rico, respectively. Compass Bank, Texas State Bank, Laredo National Bank, BBVA Bancomer USA and BBVA Puerto Rico are also depository institutions insured by, and subject to the regulation of, the Federal Deposit Insurance Corporation.

     Bancomer Transfer Services is an affiliate of BBVA, which is licensed as a money transmitter by the State of California Department of Financial Institutions and as a money services business by the Texas Department of Banking. Bancomer Transfer Services is also registered as a money services business with the Financial Crimes Enforcement Network of the U.S. Department of the Treasury.

     A major focus of U.S. governmental policy relating to financial institutions in recent years has been aimed at fighting money laundering and terrorist financing. Regulations applicable to BBVA and its affiliates impose obligations to maintain appropriate policies, procedures, and controls to detect, prevent, and report money laundering. In particular, Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), as amended, requires financial institutions operating in the United States to (i) give special attention to correspondent and payable-through bank accounts, (ii) implement enhanced reporting due diligence, and ‘know your customer’ standards for private banking and correspondent banking relationships, (iii) scrutinize the beneficial ownership and activity of certain non-U.S. and private banking customers (especially for so-called politically exposed persons), and (iv) develop new anti-money laundering programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement any existing compliance programs for purposes of requirements under the Banks Secrecy Act and the Office of Foreign Assets Control regulations. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious legal and reputational consequences for the institution.

     Regulation of Other U.S. Entities

     The Group’s U.S. broker-dealers are subject to the regulation and supervision of the SEC and the Financial Industry Regulatory Authority (FINRA) with respect to their securities activities.

     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 15 member countries that form the EMU.

     The ESCB determines and executes the single monetary policy of the 15 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.

     During 2007, there have been significant legal developments approved by the Spanish Government, with the purpose of reforming the Spanish legal system, and in particular the Spanish Securities Markets Act of 1988 (the “Securities Markets Act") in order to adapt it to several European Directives.

     Law 47/2007 amends the Securities Markets Act in order to adapt it to Directive 2004/37/EC on markets in financial instruments (MiFID), Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions, and Directive 2006/73/EC implementing Directive 2004/39/EC with respect to organizational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive. The amendments introduced represent important reforms of the Securities Markets Act and serve to (i) establish new multilateral trading facilities for listing shares apart from the Stock Markets; (ii) reinforce the measures for the protection of investors; (iii) establish new organizational requirements for investment firms; and (iv) reinforce the supervisory powers of the CNMV by establishing cooperation mechanisms among supervisory authorities.

  Law amending the Securities Markets Act on takeover bids and transparency requirements for issuers (6/2007)

     Law 6/2007 has amended several provisions of the Securities Market Act in order to adapt it to Directive 2004/25/EC on takeover bids, and Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market.

     With respect to the transparency of listed companies, Law 6/2007 (i) amends the reporting requirements with respect to periodic financial information of listed companies and issuers of listed securities; (ii) amends the disclosure regime for significant stakes; (iii) adds new information and disclosure requirements for issuers of listed securities, including disclosure regarding significant events; (iv) establishes a civil liability system of the issuer and board of directors in connection with the financial information disclosed by issuers of securities; and (v) establishes new developments in the supervision system, conferring new supervisory powers upon the CNMV with respect to the review of accounting information.

     The transparency requirements have been further developed by Royal Decree 1362/2007 developing the Securities Markets Act on transparency requirement for issuers of listed securities, which establishes the requirements relating to the content, publication and disclosure of regulated information for issuers for which Spain is the country of origin and whose shares are admitted to trading in a Spanish market. This regulated information includes: (i) periodic information to be disclosed on the annual and semi-annual financial reports and periodic statements, such as the annual accounts, the management report, and a declaration of responsibility signed by the company’s directors; (ii) information on significant shareholdings, reducing the communication threshold to 3%, and extending the disclosure obligations to the acquisition or transfer of financial instruments that grant rights to acquire shares with voting rights; (iii) treasury stock transactions, that reach or exceed 1% of voting rights; and (iv) other obligations, such as communication of remuneration systems for directors and managers, statistical information, etc.

     With respect to takeover bids, Law 6/2007 (i) establishes the cases in which a company must launch a takeover bid over the entire share capital of the relevant company; (ii) establishes that takeover bids shall be launched once a specific stake on the share capital of the company has been reached (instead of the previous system which was based on the obligation of launching a takeover bid in order to reach a specific percentage); (iii) regulates new obligations for the board of directors of the target companies of the takeover bid in terms of preventing the takeover bid; (iii) regulates the squeeze-out and sell-out when 90% of the share capital is held after a takeover bid; and (iv) establishes a new relevant control threshold by considering that control exists by the direct or indirect acquisition of a percentage of voting rights in a listed company equal to or in excess of 30%, or by holding any interest carrying less than 30% of voting rights but appointing, within 24 months following the acquisition, a number of

directors which, together with those already appointed, if any, represents more than one-half of the members of the board of directors.

     The regulations on takeover bids established by Law 6/2007, have been further developed by Royal Decree 1066/2007 on rules applicable to takeover bids for securities, completing the amendments introduced by Law 6/2007, in order to ensure that takeover bids are carried out within a comprehensive legal framework and with absolute legal certainty. The Royal Decree contains provisions regarding: (i) the scope and application to all takeover bids, whether voluntary or mandatory, for a listed company; (ii) the rules applicable to mandatory takeover bids when control of a company is obtained; (iii) other cases of takeover bids, such as bids for de-listing of securities and bids that must be made when a company wishes to reduce capital through the acquisition of its own shares for subsequent redemption thereof; (iv) the consideration and guarantees offered in a bid; (v) stages of the procedure that must be followed in a takeover bid; (vi) the mandatory duty of passivity of the board of directors of the offeree company and the optional regime of neutralisation of other preventive measures against bids; (vii) the acceptance period, the calculation of the acceptances received and the settlement of the bid; (viii) the procedures applicable to competing offers and to squeeze-outs and sell-outs; and (ix) certain rules on supervision, inspection and sanctions applicable in respect of the regulations on takeover bids.

     Below is a simplified organizational chart of BBVA’s most significant subsidiaries as of December 31, 2007. An additional approximately 330 companies are domiciled in the following countries: Argentina, Belgium, Bolivia, Brazil, Cayman Islands, Chile, Colombia, Ecuador, France, Germany, Ireland, Italy, Luxembourg, Mexico, Netherlands, Netherlands Antilles, Panama, Peru, Portugal, Puerto Rico, Spain, Switzerland, United Kingdom, United States of America, Uruguay and Venezuela.

     We own and rent a substantial network of properties in Spain and abroad, including 3,595 branch offices in Spain and, principally through our various affiliates, 4,433 branch offices abroad as of December 31, 2007. As of December 31, 2007, approximately 47.3% and 56.7% of these properties are rented in Spain and abroad, respectively, 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.

     We are in the process of building a new corporate headquarters in Madrid, Spain. The development of our new corporate headquarters will entail an investment of approximately €700 million, which includes costs for land acquisition, construction and installations. We expect to relocate approximately 6,500 employees (who currently work at 10 locations throughout Madrid) to this facility by 2010, thereby centralizing a significant portion of our operations and enhancing employee efficiency. Pursuant to this project, we sold four buildings in 2007, the results of which were recorded as capital gains of €279 million on our income statement for the year ended December 31, 2007. In addition, on June 19, 2007, we reached an agreement with Grupo Gmp to acquire real estate for €430 million in the “Parque Empresarial Forestal” in northern Madrid.

     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.

     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.

     The following table allocates changes in our net interest income between changes in volume and changes in rate for 2007 compared to 2006, and 2006 compared to 2005. 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.

     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.