UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
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 or organization)
Plaza de San Nicolás, 4
48005 Bilbao
Spain
(Address of principal executive offices)
Eduardo Ávila Zaragoza
Paseo de la Castellana, 81
28046 Madrid
Telephone number +34 91 537 7000
Fax number +34 91 537 6766
(Name, Telephone, E-mail and /or Facsimile Number and Address of Company Contact Person)
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
Guarantee of Non-Cumulative Guaranteed
Preferred Securities, Series C, liquidation preference $1,000 each, of BBVA International Preferred, S.A. Unipersonal
The ordinary shares are not listed for trading, but are listed only in connection with the registration of the American Depositary Shares, pursuant to requirements of the New York Stock Exchange.
The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Non-Cumulative Guaranteed Preferred Securities of BBVA International Preferred, S.A. Unipersonal (a wholly-owned subsidiary of Banco Bilbao Vizcaya Argentaria, S.A.).
The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Guaranteed Fixed Rate Senior Notes of BBVA U.S. Senior, S.A. Unipersonal (a wholly-owned subsidiary of Banco Bilbao Vizcaya Argentaria, S.A.).
The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Guaranteed Floating Rate Senior Notes of BBVA U.S. Senior, S.A. Unipersonal (a wholly-owned subsidiary of Banco Bilbao Vizcaya Argentaria, S.A.).
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 as of December 31, 2011, was:
Ordinary shares, par value €0.49 per share—4,903,207,003
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ¨ No x
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer x
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨
International Financial Reporting Standards as Issued by the International Accounting Standards Board x
Other ¨
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨ Item 18 ¨
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).
TABLE OF CONTENTS
PART I
ITEM 1.
A.
B.
C.
ITEM 2.
ITEM 3.
D.
ITEM 4.
E.
F.
ITEM 4A.
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
G.
H.
I.
ITEM 11.
ITEM 12.
PART II
ITEM 13.
ITEM 14.
ITEM 15.
ITEM 16.
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
PART III
ITEM 17.
ITEM 18.
ITEM 19.
CERTAIN TERMS AND CONVENTIONS
The terms below are used as follows throughout this report:
“BBVA”, “Bank”, the “Company”, the “Group” or the “BBVA Group” means Banco Bilbao Vizcaya Argentaria, S.A. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires.
“BBVA Bancomer” means Bancomer S.A. and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.
“BBVA Compass” means Compass Bancshares, Inc. and its consolidated subsidiaries, unless otherwise indicated or the context otherwise requires.
“Consolidated Financial Statements” means our audited consolidated financial statements as of and for the years ended December 31, 2011, 2010 and 2009 prepared in accordance with the International Financial Reporting Standards adopted by the European Union (“EU-IFRS”) required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).
“Latin America” refers to Mexico and the countries in which we operate in South America and Central America.
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.
CAUTIONARY STATEMENT REGARDING 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, as amended (the “Securities Act”) Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 the items listed below, identifies important factors that could cause such differences:
“Item 3. Key Information—Risk Factors”;
“Item 4. Information on the Company”;
“Item 5. Operating and Financial Review and Prospects”; and
“Item 11. Quantitative and Qualitative Disclosures About Market Risk”.
Other important factors that could cause actual results to differ materially from those in forward-looking statements include, among others:
general political, economic and business conditions in Spain, the European Union (“EU”), Latin America, the United States and other regions, countries or territories in which we operate;
changes in applicable laws and regulations, including increased capital requirements;
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the monetary, interest rate and other policies of central banks in Spain, the EU, the United States, Mexico and elsewhere;
changes or volatility in interest rates, foreign exchange rates (including the euro to U.S. dollar exchange rate), asset prices, equity markets, commodity prices, inflation or deflation;
ongoing market adjustments in the real estate sectors in Spain, Mexico and the United States;
the effects of competition in the markets in which we operate, which may be influenced by regulation or deregulation;
changes in consumer spending and savings habits, including changes in government policies which may influence investment decisions;
our ability to hedge certain risks economically;
our success in managing the risks involved in the foregoing, which depends, among other things, on our ability to anticipate events that cannot be captured by the statistical models we use; and
force majeure and other events beyond our control.
Readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date hereof. We undertake 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 our business or acquisition strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.
PRESENTATION OF FINANCIAL INFORMATION
Accounting Principles
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 EU-IFRS. The Bank of Spain issued Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats (as amended or supplemented from time to time, “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. The financial statements included in our annual report on Form 20-F for the year ended December 31, 2010 (the “2010 Form 20-F”) included financial statements for the three years then-ended prepared in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004. It also included a reconciliation of certain financial information to U.S. GAAP.
We have concluded that differences between EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and IFRS-IASB are not material for the three years ended December 31, 2011. Accordingly, the Consolidated Financial Statements included in this Annual Report have been prepared in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and in compliance with IFRS-IASB. As a result, this Annual Report does not include a reconciliation of certain financial information to U.S. GAAP.
In order to present financial information for all periods on a basis consistent with IFRS-IASB, we have restated under IFRS-IASB the financial information as of and for the years ended December 31, 2008 and 2007 previously reported in our respective annual reports for certain prior years, which had
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been prepared in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004. See “Item 3. Key Information—Selected Consolidated Financial Data—Restatement” for a reconciliation to amounts previously reported.
Statistical and Financial Information
The following principles should be noted in reviewing the statistical and financial information contained herein:
Average balances, when used, are based on the beginning and the month-end balances during each year. We do not believe that such monthly averages present trends that are materially different from those that would be presented by daily averages.
The book value of BBVA’s ordinary shares held by its consolidated subsidiaries has been deducted from equity.
Unless otherwise stated, any reference to loans refers to both loans and leases.
Interest income figures include interest income on non-accruing loans to the extent that cash payments have been received in the period in which they are due.
Financial information with respect to subsidiaries may not reflect consolidation adjustments.
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.
Not Applicable.
Selected Consolidated Financial Data
The historical financial information set forth below for the years ended December 31, 2011, 2010 and 2009 has been selected from, and should be read together with, the Consolidated Financial Statements included herein. For information concerning the preparation and presentation of the financial information contained herein, see “Presentation of Financial Information”. In order to present financial information for all periods on a basis consistent with IFRS-IASB, we have restated under IFRS-IASB the financial information as of and for the years ended December 31, 2008 and 2007 previously reported in our respective annual reports for certain prior years, which had been prepared in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004. This restatement relates exclusively to the amounts of impairment losses on financial assets (net). See “—Restatement” below for a reconciliation to amounts previously reported. The audited financial statements for the years ended December 31, 2008 and 2007 are not included in this document but they can be found, on an unrestated and non-comparable basis, in the respective annual reports for certain prior years previously filed by us.
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Consolidated statement of income data
Interest and similar income
Interest and similar expenses
Net interest income
Dividend income
Share of profit or loss of entities accounted for using the equity method
Fee and commission income
Fee and commission expenses
Net gains(losses) on financial assets and liabilities
Net exchange differences
Other operating income
Other operating expenses
Gross income
Administration costs
Depreciation and amortization
Provisions (net)
Impairment losses on financial assets (net)
Net operating income
Impairment losses on other assets (net)
Gains (losses) on derecognized assets not classified as non-current asset held for sale
Negative goodwill
Gains (losses) in non-current assets held for sale not classified as discontinued operations
Income before tax
Income tax
Income from continuing transactions
Income from discontinued transactions (net)
Net income
Net income attributed to parent company
Net income attributed to non-controlling interests
Per share/ADS(1) data
Net operating income(2)
Numbers of shares outstanding (at period end)(3)
Income attributed to parent company(4)
Dividends declared
Restated to comply with IFRS-IASB. See “—Restatement” below for a reconciliation to amounts previously reported.
Each American Depositary Share (“ADS”) represents the right to receive one ordinary share.
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Calculated on the basis of the weighted average number of BBVA’s ordinary shares outstanding during the relevant period excluding the weighted average number of treasury shares during the period (4,635 million, 3,762 million, 3,719 million, 3,706 million and 3,594 million shares in 2011, 2010, 2009, 2008 and 2007, respectively).
As of the date of this annual report, April 26, 2012, the number of shares outstanding was 5,061,082,378, as a result of the voluntary conversion of BBVA’s mandatory convertible subordinated bonds issued in December 2011, which resulted in the issuance of 157,875,375 new ordinary shares, each with a nominal value of €0.49. See Note 59 to the Consolidated Financial Statements.
Calculated on the basis of the weighted average number of BBVA’s ordinary shares outstanding during the relevant period including the average number of estimated shares to be converted and, for comparative purposes, a correction factor to account for the capital increases carried out in November 2010, April 2011 and October 2011, and excluding the weighted average number of treasury shares during the period (4,769 million, 4,097 million, 3,965 million, 3,963 million and 3,823 million shares in 2011, 2010, 2009, 2008 and 2007, respectively). With respect to the years ended December 31, 2011, 2010 and 2009, see Note 5 to the Consolidated Financial Statements.
Consolidated balance sheet data
Total assets
Common stock
Loans and receivables (net)
Customer deposits
Debt certificates and subordinated liabilities
Non-controlling interest
Total equity
Consolidated ratios
Profitability ratios:
Net interest margin(1)
Return on average total assets(2)
Return on average equity(3)
Credit quality data
Loan loss reserve
Loan loss reserve as a percentage of total loans and receivables (net)
Non-performing asset ratio (NPA ratio)(4)
Substandard loans and advances to customers
Substandard contingent liabilities to customers(5)
Loans and advances to customers
Contingent liabilities to customers
Represents net interest income as a percentage of average total assets.
Represents net income as a percentage of average total assets.
5
Represents net income attributed to parent company as a percentage of average equity.
Represents the sum of substandard loans and advances to customers and substandard contingent liabilities to customers divided by the sum of loans and advances to customers and contingent liabilities to customers.
We include contingent liabilities in the calculation of our non-performing asset ratio (NPA ratio). We believe that substandard contingent liabilities should be included in the calculation of our NPA ratio where we have reason to know, as of the reporting date, that they are impaired. The credit risk associated with contingent liabilities (consisting mainly of financial guarantees provided to third-parties on behalf of our customers) is evaluated and provisioned according to the probability of default of our customers’ obligations. If substandard contingent liabilities were not included in the calculation of our NPA ratio, such ratio would generally be higher for the periods covered, amounting to approximately 4.3%, 4.4%, 4.6%, 2.5% and 1.0% as of December 31, 2011, 2010, 2009, 2008 and 2007, respectively.
Restatement
In order to present financial information for all periods on a basis consistent with IFRS-IASB, we have restated under IFRS-IASB the financial information as of and for the years ended December 31, 2008 and 2007 previously reported in our respective annual reports for certain prior years, which had been prepared in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004. The table below shows the revisions made to our impairment losses on financial assets (net) for the years ended December 31, 2008 and 2007, respectively, which have been restated in accordance with our internal risk models. Previously reported impairment losses on financial assets (net) were calculated under EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004, which required the use of “peer group” information in the calculation of allowances for incurred but not reported loss. Our internal risk models calculate the best estimate of the expected value of the loan portfolio taking into consideration our experience, the profiles of debtors and the macroeconomic conditions at the end of the reported period, in compliance with IFRS-IASB.
Net income attributed to the parent company
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Substandard contingent liabilities to customers
EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004.
Exchange Rates
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.
Year ended December 31
2007
2008
2009
2010
2011
2012 (through April 20, 2012)
Calculated by using the average of the exchange rates on the last day of each month during the period.
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Month ended
October 31, 2011
November 30, 2011
December 31, 2011
January 31, 2012
February 29, 2012
March 31, 2012
April 30, 2012 (through April 20, 2012)
The noon buying rate for euro from the Federal Reserve Bank of New York, expressed in dollars per €1.00, on April 20, 2012, was $1.3212.
As of December 31, 2011, approximately 39% of our assets and approximately 37% of our liabilities were denominated in currencies other than euro. See Note 2.2.16 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 Management—Market Risk in Non-Trading Activities in 2011—Structural Exchange Rate Risk”.
B. Capitalization and Indebtedness
C. Reasons for the Offer and Use of Proceeds
Risk Factors
Risks Relating to Us and Our Business
We are subject to substantial regulation, and regulatory and governmental oversight. Adverse regulatory developments or changes in government policy could have a material adverse effect on our business, results of operations and financial condition.
The financial services industry is among the most highly regulated industries in the world. Our operations are subject to ongoing regulation and associated regulatory risks, including the effects of changes in laws, regulations, policies and interpretations, in Spain, the European Union, the United States and the other markets where we operate. This is particularly the case in the current market environment, which is witnessing increased levels of government and regulatory intervention in the banking sector which we expect to continue for the foreseeable future. The regulations which most significantly affect us include regulations relating to capital requirements, which are discussed in detail below.
In addition, we are subject to substantial regulation relating to other matters such as liquidity. We cannot predict if increased liquidity standards, if implemented, could require us to maintain a greater proportion of our assets in highly-liquid but lower-yielding financial instruments, which would negatively affect our net interest margin.
We are also subject to other regulations, such as those related to anti-money laundering, privacy protection and transparency and fairness in customer relations.
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Adverse regulatory developments or changes in government policy relating to any of the foregoing or other matters could have a material adverse effect on our business, results of operations and financial condition. Furthermore, regulatory fragmentation, with some countries implementing new and more stringent standards or regulation, could adversely affect our ability to compete with financial institutions based in other jurisdictions which do not need to comply with such new standards or regulation.
Capital requirements
Increasingly onerous capital requirements constitute one of our main regulatory concerns. See “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Capital Requirements.”
As a Spanish financial institution, we are subject to the Bank of Spain Circular 3/2008 (“Circular 3/2008”), of May 22, on the calculation and control of minimum capital requirements, as amended by Bank of Spain Circular 4/2011 (“Circular 4/2011”), which implements Capital Requirement Directive III (“CRD III”).
Moreover, we will be subject to the new Basel III capital standards, which will be phased in from January 1, 2013 until January 1, 2019. Despite the Basel III framework setting minimum transnational levels of regulatory capital and a measured phase-in, many national authorities have started a race to the top for capital by gold-plating both requirements and the associated interpretation calendars. In particular, while the European transposition of these standards will be done through the CRD IV throughout 2012, the Spanish Government anticipated Basel III with the Royal Decree-Law 2/2011, of February 18 (“RD-L 2/2011”), as part of a wider plan of the Spanish Government for the strengthening of the financial sector by imposing stricter capital requirements. This lack of uniformity may lead to an uneven playing field and to competition distortions. Moreover, regulatory fragmentation, with some countries bringing forward the application of Basel III requirements or increasing such requirements, could adversely affect a bank with global operations such as BBVA and could undermine our profitability. As of December 31, 2011, our “principal capital” ratio, as calculated in accordance with RD-L 2/2011, was 9.7%, compared with the minimum required ratio of 8%.
In addition, following an evaluation of the capital levels of 71 financial institutions throughout Europe (including BBVA) based on data available as of September 30, 2011, the European Banking Authority (“EBA”) issued a recommendation pursuant to which, on an exceptional and temporary basis, financial institutions based in the EU should reach a new minimum Core Tier 1 ratio (9%) by June 30, 2012. This recommendation is temporary in nature and seeks to restore market confidence in the European financial system. Accordingly, the EBA has announced its intention to lift this recommendation once confidence in the European financial markets is restored. Based on September 30, 2011 data, the BBVA Group would need to increase its capital base by €6,329 million in order to reach this recommended minimum Core Tier 1 ratio by June 30, 2012. On January 20, 2012, the BBVA Group submitted to the Bank of Spain an action plan setting forth the steps that the group intends to take in order to reach the recommended minimum Core Tier 1 ratio by June 30, 2012. This plan has been examined by the Bank of Spain jointly with the EBA. On March 7, 2012, Bank of Spain approved this plan.
Moreover, through Royal Decree-Law 2/2012, of February 3 (“RD-L 2/2012”), the Spanish Government has recently increased coverage requirements for certain real estate assets. Among other requirements, certain provisions for problematic credit assets and asset foreclosures need to be supplemented with an additional capital buffer of €1.2 billion by December 31, 2012. Based on December 31, 2011 data, we satisfied this requirement as of such date.
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There can be no assurance that the implementation of these new standards will not adversely affect our ability to pay dividends, or require us to issue additional securities that qualify as regulatory capital, to liquidate assets, to curtail business or to take any other actions, any of which may have adverse effects on our business, financial condition and results of operations. Furthermore, increased capital requirements may negatively affect our return on equity and other financial performance indicators.
Regulatory reforms initiated in the United States
Our operations may also be affected by other recent regulatory reforms in response to the financial crisis, including measures such as those concerning systemic financial institutions and the enactment in the United States in July 2010 of the Dodd-Frank Act. See “Item 4. Information on the Company—Business Overview—The United States—U.S. Regulation—Dodd-Frank Act.” Among other changes, beginning five years after enactment of the Dodd-Frank Act, the Federal Reserve Board will apply minimum capital requirements to U.S. intermediate bank holding company subsidiaries of non-U.S. banks. Although there remains uncertainty as to how regulatory implementation of this law will occur, various elements of the new law may cause changes that impact the profitability of our business activities and require that we change certain of our business practices, and could expose us to additional costs (including increased compliance costs). These changes may also cause us to invest significant management attention and resources to make any necessary changes.
Current economic conditions may make it more difficult for us to continue funding our business on favorable terms or at all.
Historically, one of our principal sources of funds has been savings and demand deposits. Time deposits represented 27%, 29% and 33% of our total funding as of December 31, 2011, 2010 and 2009, respectively. Large-denomination time deposits may, under some circumstances, such as during periods of significant interest rate-based competition for these types of deposits, be a less stable source of deposits than savings and demand deposits. Moreover, since we rely heavily on short-term deposits for our funding, we cannot assure you that, in the event of a sudden or unexpected withdrawal of deposits or 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. In addition, if public sources of liquidity, such as the ECB extraordinary measures adopted in response to the financial crisis since 2008, are removed from the market, we cannot assure you that we will be able to continue funding our business or, if so, maintain our current levels of funding without incurring higher funding costs or having to liquidate certain of our assets.
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. In addition, the trend towards consolidation in the banking industry has created larger and stronger banks with which we must now compete, some of which have recently received public capital.
We also face competition from non-bank competitors, such as:
department stores (for some credit products);
automotive finance corporations;
leasing companies;
factoring companies;
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mutual funds;
pension funds;
insurance companies; and
public debt (as a result of the high yields which are being currently offered as a consequence of the sovereign debt crisis).
We cannot assure you that this competition will not adversely affect our business, financial condition, cash flows 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 the EU and national governments, domestic and international economic and political conditions and other factors. In Spain, competition distortions in the term deposits market have intensified, and this situation is expected to continue due to the liquidity needs of certain financial institutions, which are offering high interest rates to attract additional deposits, despite the fact that these institutions will have to increase their contribution to the Deposit Guarantee Fund for this kind of highly remunerated deposits.
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.
Since approximately 69% of our loan portfolio as of December 31, 2011 consisted of variable interest rate loans maturing in more than one year, our business is particularly vulnerable to volatility in interest rates.
We have a substantial amount of commitments with personnel considered wholly unfunded due to the absence of qualifying plan assets.
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 €2,429 million,€2,904 million and€244 million, respectively, as of December 31, 2011, €2,497 million, €3,106 million and€377 million, respectively, as of December 31, 2010 and, €2,536 million, €3,309 million and€401 million, respectively, as of December 31, 2009. 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
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benefits” through oversight by the Assets and Liabilities Committee (“ALCO”) of the Group. 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. Should we fail to adequately manage liquidity risk and interest rate risk either as described above or otherwise, it could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Risks Relating to Spain and Europe
The deterioration of economic conditions in Spain and the European Union could have a material adverse effect on the financial system as a whole and, therefore, on our business, results of operations and financial condition.
We are a Spanish banking company and conduct substantial business activities in Spain. Like other banks operating in Spain and Europe, our performance and liquidity may be affected by economic conditions affecting Spain and other EU member states.
The evolution of the global economy is heavily dependent on the resolution of the European debt crisis, which outlook has worsened over the last few months of 2011. Four main factors lie behind this trend:
First, lower than expected economic growth mainly, but not only, in developed economies. Economic activity in Europe is on a clear decelerating path. Certain countries in Europe, including Spain, have relatively large sovereign debt or fiscal deficits, or both, which has led to tensions in the international debt capital markets and interbank lending market and euro exchange rate volatility during 2011.
Second, the sovereign debt crisis in Europe has intensified and turned more systemic. The Portuguese and Irish rescue programs and the uncertainty over the Greek rescue program have spread doubts about other peripheral economies such as Spain and Italy. Successive European summits since October 2011 and the ECB’s intervention served to gain time, but further progress focused on the completion of the new EU fiscal treaty and strengthening the liquidity firewall and reforms in the periphery are still required.
Third, the connection between EU sovereign concerns and concerns for the health of the European financial system has intensified, and financial tensions in Europe have reached levels, in many respects, higher than those present after the collapse of Lehman Brothers in October 2008. Financial stress in Europe has increased the cost of financing of governments and financial institutions which, in some cases, have lost access to international funding.
Finally, growing risk aversion has increased financial market volatility significantly, spilling over to most risky assets and emerging economies for the first time since 2009.
Although some progress has been made since October 2011, we believe a definitive resolution to the European economic crisis requires more decisive action on three fronts. First, concerns surrounding Greece’s solvency must continue to be resolved in an orderly fashion and as quickly as possible, such as pursuant to the recently completed debt exchange with private sector bondholders. In February 2012, the Eurogroup meeting agreed on a second bail-out for Greece amounting to €130 billion, but considerable uncertainties remain concerning the implementation of the bail-out package. At the same time, the mechanisms created to prevent contagion in countries that are solvent but faced with liquidity problems, must be increased and made more flexible to become more effective. Second, structural reforms that stimulate growth must be introduced, including reforms to make financial institutions stronger without triggering sudden deleveraging and restricting credit. And third, the governance agreements approved recently in the Eurozone must begin working so they can provide a clear roadmap to fiscal union, strengthen monetary union, prevent future crises and enhance the credibility of European institutions and countries.
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The situation in Portugal is particularly challenging. The first review led by the troika and released in mid-August 2011 showed its satisfaction with the performance of the Portuguese economy, but highlighted rising concerns on Portugal’s ability to meet its targets for 2012. This led to a sequence of announcements of additional saving measures to cover the impact of (i) the recognition of deficit and debt misreporting in the region of Madeira and (ii) a worse than expected cyclical behavior. Economic activity in Portugal contracted in 2011 (though less than anticipated) as stagnation in the second quarter of 2011 was followed by contraction in the second half of the year. The economy is set to remain in a deep recession in 2012, with a rebound predicted in 2013. The main drivers behind this outlook can be found in the strong fiscal adjustment to be undertaken in 2012 and in the difficult market and financial conditions that have led most of the economic indicators into negative territory. Confidence continues fading at all levels, reflected in weakening industrial and service sectors, as well as in decreasing investment. Consumption has taken a downturn, with no rebound on the horizon. As a result, Portuguese GDP is expected to fall by around 2.7% in 2012. As of December 31, 2011, our gross exposure to Portuguese customers amounted to €7.8 billion (around 1% of our total assets and 2% of the Group’s outstanding loans).
Economic conditions remain uncertain in Spain, Portugal and the European Union and may deteriorate in the future, which could adversely affect the cost and availability of funding for Spanish and European banks, including BBVA, adversely affecting our loan portfolio or otherwise adversely affect our business, financial condition and results of operations.
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 have historically developed our lending business in Spain, which continues to be our main place of business. As of December 31, 2011, business activity in Spain accounted for 55% of our loan portfolio. See “Item 4. Information on the Company—Selected Statistical Information—ASSETS—Loans and Advances to Customers—Loans by Geographic Area.”
After rapid economic growth until 2007, Spanish gross domestic product (“GDP”) grew by 0.9% in 2008, contracted by 3.7% and 0.1% in 2009 and in 2010, respectively, and grew by 0.7% in 2011. Our Economic Research Department (“BBVA Research”) estimates that the Spanish economy will show a negative growth rate in 2012. Forecasts point towards a 1.3% contraction of GDP in 2012 and a slow recovery in 2013. As a result of this contraction, it is expected that economic conditions and unemployment in Spain will continue to deteriorate in 2012.
In addition, GDP forecasts for the Spanish economy could be further revised downwards if measures adopted in response to the economic crisis are not as effective as expected or if public deficit figures force the government to implement additional restrictive measures. In addition to the tightening of fiscal policies in order to correct its economic imbalances, Spain has seen confidence erode, export growth fall, expectations of further fiscal adjustment in 2012 because of the failure to meet 2011 budget targets, weaker activity and, above all, a deterioration in employment in 2011.
The effects of the financial crisis have been particularly pronounced in Spain given Spain’s heightened need for foreign financing as reflected by its high current account and public deficits. Real or perceived difficulties in making the payments associated with these deficits can further damage Spain’s economic situation and increase the costs of financing its public deficit. The aforementioned may be exacerbated by the following:
The Spanish economy is particularly sensitive to economic conditions in the rest of the Euro area, the primary market for Spanish goods and services exports.
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The domestic demand in 2011 was heavily impacted by fiscal policy both directly, through the progressive contraction on public sector demand (as a result, among other reasons, of tighter fiscal targets), and indirectly, through the impact of these reforms on the consumption and investment decisions of private agents.
Although the new labor market reform is intended to slow the amount of jobs destroyed in 2012, unemployment is expected to remain above 20% during 2012 and 2013.
In 2012, the continued deterioration of the labor market may trigger a decline in the wage component of a household’s gross disposable income. Furthermore, the increase of fiscal pressures due to the country’s effort to meet the public deficit targets set for 2012 will reduce the non-wage component of disposable income, despite the possible increase in the volume of unemployment benefits. Higher personal income taxes will also have a negative effect. Households’ nominal disposable income has remained constant in 2011 and is expected to fall by 1.5% in 2012.
Net financial wealth is not expected to recover until 2013 as a result of the real estate sector adjustments and we expect these adjustments to continue for the coming years.
Investment in residential real estate contracted by approximately 4.8% in 2011 and a further 6.5% contraction is expected in 2012. In addition, demand for real estate decreased in 2011, primarily as a result of the high unemployment rates and the rise in the personal income tax.
Our loan portfolio in Spain has been adversely affected by the deterioration of the Spanish economy in 2011, 2010 and 2009. In particular, a portion of our loan portfolio consists of residential mortgages and consumer loans to low- and lower middle-income customers and commercial loans to medium- and small-sized companies. As of December 31, 2011, loans to low- and lower middle-income customers and medium- and small-sized companies amounted to approximately 14% and 6%, respectively, of our total loans and receivables to customers in Spain. These groups may be more affected by periods of slowdown in economic activity and, consequently, we may experience higher levels of past due amounts with respect to such groups, which could result in higher levels of allowance for loan losses. Our total substandard loans to customers in Spain amounted to €11,043 million, €10,954 million and€10,973 million as of December 31, 2011, 2010 and 2009, respectively, principally due to the deterioration in the macroeconomic environment. Our total substandard loans to customers in Spain as a percentage of total loans and receivables to customers in Spain were 5.5%, 5.2% and 5.4% as of December 31, 2011, 2010 and 2009, respectively. Our loan loss reserves to customers in Spain as a percentage of substandard loans to customers is Spain as of December 31, 2011, 2010 and 2009 were 43%, 45% and 44%, respectively.
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.
Exposure to the Spanish real estate market makes us vulnerable to developments in this market.
In the years prior to 2008, economic growth, strong labor markets and low interest rates in Spain caused an increase in the demand for housing, which resulted in an increase in demand for mortgage loans. This increased demand and the widespread availability of mortgage loans affected housing prices, which rose significantly. After this buoyant period, demand began to adjust in mid-2006. Since the last quarter of 2008, the supply of new homes has been adjusting sharply downward in the residential market in Spain, but a significant excess of unsold homes still exists in the market. Residential real estate mortgages to individuals represented 21.9%, and 23.1% of our domestic loan portfolio as of December 31, 2011 and 2010, respectively.
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We expect housing demand to remain weak and housing transactions to continue decreasing in 2012, even though some measures adopted on December 30, 2011, such as the renewal of government tax breaks for home purchases and super-reduced value added tax rate applicable to real estate transactions should positively influence the demand. Loans for the development of real estate and housing construction in Spain amounted €14,158 million as of December 31, 2011, and represented 7% of our gross domestic lending as of December 31, 2011, which is below the average in the Spanish financial sector according to the Bank of Spain. Our non-performing real estate loans represented 26.4% of our real estate portfolio as of such date.
Highly-indebted households and corporations could endanger our asset quality and future revenues.
Spanish households and businesses have reached, in recent years, a high level of indebtedness, which represents increased risk for the Spanish banking system. In addition, the high proportion of loans referenced to variable interest rates (approximately 69% of our loan portfolio as of December 31, 2011) makes debt service on such loans more vulnerable to changes in interest rates than in the past. Highly indebted households and businesses are less likely to be able to service debt obligations as a result of adverse economic events, which could have an adverse effect on our loan portfolio and, as a result, on our financial condition and results of operations. Moreover, 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 and limiting our ability to attract new customers in Spain satisfying our credit standards, which could have an adverse effect on our ability to achieve our growth plans.
Risks Relating to Latin America
Events in Mexico could adversely affect our operations.
We are substantially dependant on our Mexican operations, with approximately €1,741 million, €1,707 million and€1,357 million of the net income attributed to parent company in 2011, 2010 and 2009, respectively, being generated in Mexico (58%, 37% and 32% of our net income attributed to parent company in 2011, 2010 and 2009, respectively). We face several types of risks in Mexico which could adversely affect our banking operations in Mexico or the Group as a whole. Given the internationalization of the financial crisis, the Mexican economy has felt the effects of the global financial crisis and the adjustment process that was underway. This process has intensified since the end of the first quarter of 2011, as a result of the European sovereign crisis. In addition, there are downward risks in Mexico due to a possible lower demand from the U.S., where growth perspectives for 2012 are clearly downward. While analysts’ consensus points to 2012 seeing Mexican GDP growth of around 3.1% (3.3% according to BBVA Research), it is possible that in a more unfavorable environment for the global economy, and particularly in Europe or the United States or otherwise, growth in Mexico will be negative in 2012.
As of December 31, 2011, 2010 and 2009, our mortgage loan portfolio delinquency rates in Mexico were 4.1%, 3.3% and 4.4%, respectively, and our consumer loan portfolio delinquency rates were 2.5%, 2.9% and 4.0%, respectively. If there is a an increase in unemployment rates, which could arise if there is a more pronounced or prolonged slowdown in Europe or the United States, it is likely that such rates will further increase.
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In addition, any tightening of the monetary policy, including to address upward inflationary pressures, could make it more difficult for customers of our mortgage and consumer loan products in Mexico to service their debts, which could have a material adverse effect on the business, financial condition, cash flows and results of operations of our Mexican subsidiary or the Group as a whole. Furthermore, price regulation, and competition could squeeze the profitability of our Mexican subsidiary. If this were to occur, the market share of our Mexican subsidiary could decrease given its risk management standards. The depreciation of the Mexican peso could also adversely affect the contribution of our Mexican subsidiary to the BBVA Group. Finally, political instability or social unrest could weigh on the economic outlook, which could increase economic uncertainty and capital outflows. Additionally, if the approval of certain structural reforms is delayed, this could make it more difficult to reach potential growth rates in the Mexican economy.
Any of these risks or other adverse developments in laws, regulations, public policies 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.
Our Latin American subsidiaries’ growth, asset quality and profitability may be affected by volatile macroeconomic conditions, including significant inflation and government default on public debt, in the Latin American countries where they operate.
The Latin American countries in which we operate have experienced significant economic volatility in recent decades, characterized by recessions, foreign exchange crises 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. In addition, significant inflation can negatively affect our results of operations as was the case in the year ended December 31, 2009, when as a result of the characterization of Venezuela as a hyperinflationary economy, we recorded a€90 million decrease in our net income attributed to parent company.
In addition, as a result of the more challenging global environment and the danger of recession in developed countries, the monetary authorities of certain Latin American countries are holding back the withdrawal of monetary stimuli longer than expected. Possible overheating is leaving economies more vulnerable to an adverse external shock because the growing gap between domestic demand and GDP is making them more dependent on the maintenance of high terms of trade. Inflation has been higher than expected, particularly in Chile and Peru. This has limited consumer purchasing power despite major increases in employment and wages.
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, no assurance can be given that our Latin American subsidiaries’ growth, asset quality and profitability will not be further affected by volatile macroeconomic conditions in the Latin American countries in which we operate.
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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 the U.S. or in Europe under current circumstances, 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. These economies are also vulnerable to conditions in global financial markets and especially to commodities price fluctuations and these vulnerabilities usually reflect adversely in financial market conditions through exchange rate fluctuations, interest rate volatility and deposits volatility. For example, at the beginning of the financial crisis these economies were hit by a simultaneous drop in commodity export prices, a collapse in demand for non-commodity exports and a sudden halting of foreign bank loans. Even though most of these countries withstood the triple shock rather well, with limited damage to their financial sectors, we have seen non-performing loan ratios rise as well as contraction in bank deposits and loans. As a global economic recovery remains fragile, there are risks of a relapse. If the global financial crisis continues and, in particular, if the effects on the Chinese and U.S. economies intensify the business, financial condition, operating results and cash flows of our subsidiaries in Latin America are likely to be materially adversely affected.
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, results of operations.
We operate commercial banks and insurance and private pension companies in various 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 or expropriation 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. In addition, there has been an increase in global risk aversion at the start of the last quarter of 2011, as reflected by the pressure on certain currencies and higher levels of perceived uncertainty. This has been particularly the case with Argentina, where the depreciation of the Brazilian real increased pressure on the Argentinean peso, leading to liquidity problems and controls in the foreign-exchange market.
Our presence in Latin American markets also 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.
Regulatory changes in Latin America that are beyond our control may have a material effect on our business, financial condition, results of operations and cash flows.
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.
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Changes in regulations that are beyond our control may have a material effect on our business and operations, particularly in Venezuela and Argentina. 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.
Private pension management companies are heavily regulated and are exposed to major risks concerning changes in those regulations in areas such as reserve requirements, fees and competitive conditions.
Risks Relating to the United States
Our continued expansion in the United States increases our exposure to the U.S. market.
Our expansion in the United States makes us more vulnerable to developments in this market, particularly the real estate market. During the summer of 2007, the difficulties experienced by the subprime mortgage market triggered a real estate and financial crisis, which has had significant effects on the real economy and which has resulted in significant volatility and uncertainty in markets and economies around the world. As we have acquired entities or assets in the United States, particularly BBVA Compass and certain deposits and liabilities of Guaranty Bank (“Guaranty”), our exposure to the U.S. market has increased. The recent economic growth estimates for the U.S., showing that economic recovery is slower than expected, and growing regulatory pressure in the U.S. financial sector resulted in a write down of goodwill related to our acquisition of BBVA Compass in the aggregate amount of €1,444 million as of December 31, 2011. See Note 20 to our Consolidated Financial Statements. Similar or worsening economic conditions in the United States could have a material adverse effect on the business, financial condition, results of operations and cash flows of our subsidiary BBVA Compass, or the Group as a whole, and could require us to provide BBVA Compass with additional capital.
Risks Relating to Other Countries
Our strategic growth in Asia exposes us to increased regulatory, economic and geopolitical risk relating to emerging markets in the region, particularly in China.
Pursuant to certain transactions completed in the past few years (see Note 17 to our Consolidated Financial Statements), we increased our ownership interest in members of the CITIC Group, a Chinese banking group, by increasing our stake in CITIC International Financial Holdings Ltd (“CIFH”) to 29.7% and China National Citic Bank (“CNCB”) to 10.07% as of December 31, 2010. CIFH is a banking entity headquartered in Hong Kong and CNCB is a banking entity headquartered in China
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, including changes in laws or regulations or in the interpretation of existing laws or regulations, concerning the economy and state-owned enterprises, or otherwise affecting our activity, could have a significant effect on Chinese private sector entities in general, and on CIFH or CNCB in particular. Chinese authorities have implemented a series of monetary tightening and macro prudential policies to slow credit growth and to contain rises in real estate prices. These could undermine profitability in the banking sector generally and CIFH’s and CNCB’s respective profitability in particular. Our business in China may also be affected by the increased credit quality risks resulting from the recent increase in local government debt and financial stresses in smaller companies as their access to various forms of non-bank credit is tightened.
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In addition, while we believe long term prospects in both China and Hong Kong are positive, particularly for the consumer finance market, near term risks are present from the impact of a slowdown in global growth, which could result in tighter financing conditions and could pose risks to credit quality. China’s GDP growth has moderated following efforts to avert overheating and steer the economy towards a soft landing. While domestic demand and production remain strong, there is an increased probability of a hard landing as a result of the uncertainties concerning the global environment, exacerbated by a rise in domestic financial fragilities.
Any of these developments could have a material adverse effect on our investments in China and Hong Kong or the business, financial condition, results of operations and cash flows of the Group.
Since Garanti operates primarily in Turkey, economic and other developments in Turkey may have a material adverse effect on Garanti’s business, financial condition and results of operations and the value of our investment in Garanti.
In 2011, we acquired a 25.01% interest in Türkiye Garanti Bankasi A.Ş. (“Garanti”). Most of Garanti’s operations are conducted, and most of its customers are located, in Turkey. Accordingly, Garanti’s ability to recover on loans, its liquidity and financial condition and its results of operations are substantially dependent upon the political, economic, financial and geopolitical conditions prevailing in or that otherwise affect Turkey. If the Turkish economy is adversely affected by, among other factors, a reduction in the level of economic activity, continuing inflationary pressures, devaluation or depreciation of the Turkish Lira, a natural disaster or an increase in domestic interest rates, then a greater portion of Garanti’s customers may not be able to repay loans when due or meet their other debt service requirements to Garanti, which would increase Garanti’s past due loan portfolio and could materially reduce its net income and capital levels. After growing by approximately 8.5% in 2011, the Turkish economy is expected to grow by 1.9% in 2012. In addition, inflation is expected to further increase by 9.1% in 2012. Moreover, the current account deficit has widened during 2011, raising concerns about Turkey’s vulnerability to a sudden stop of capital flows.
Furthermore, political uncertainty or instability within Turkey and in some of its neighboring countries has historically been one of the potential risks associated with investments in Turkish companies. Despite Turkey’s increased political and economic stability in recent years and the implementation of institutional reforms to conform to international standards, Turkey is an emerging market and it is subject to greater risks than more developed markets. Financial turmoil in any emerging market could negatively affect other emerging markets, including Turkey, or the global economy in general. Moreover, financial turmoil in emerging markets tends to adversely affect stock prices and debt securities prices of other emerging markets as investors move their money to more stable and developed markets, and may reduce liquidity to companies located in the affected markets. An increase in the perceived risks associated with investing in emerging economies in general, or Turkey in particular, could dampen capital flows to Turkey and adversely affect the Turkish economy. In addition, a further deterioration in the EU accession process may negatively affect Turkey. Any of these risks could have a material adverse effect on Garanti’s business, financial condition and results of operations and the value of our investment in Garanti.
Foreign exchange, political and other risks relating to Turkey could cause an adverse effect on Garanti’s business, financial condition and results of operations and the value of our investment in Garanti.
As a result of the consummation of the Garanti acquisition, we will be exposed to foreign exchange, political and other risks relating to Turkey. For example, currency restrictions and other restraints on transfer of funds may be imposed by the Turkish government, Turkish government regulation or administrative polices may change unexpectedly or otherwise negatively affect Garanti,
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the Turkish government may increase its participation in the economy, including through expropriations or nationalizations of assets, or the Turkish government may impose burdensome taxes or tariffs. The occurrence of any or all of the above risks could have a material adverse effect on Garanti’s business, financial condition and results of operations and the value of our investment in Garanti.
In addition, a significant majority of Garanti’s total securities portfolio is invested in securities issued by the Turkish government. In addition to any direct losses that Garanti might incur, a default, or the perception of increased risk of default, by the Turkish government in making payments on its securities or the possible downgrade in Turkey’s credit rating would likely have a significant negative impact on the value of the government securities held in Garanti’s securities portfolio and the Turkish banking system generally and make such government securities difficult to sell, and may have a material adverse effect on Garanti’s business, financial condition and results of operations and the value of our investment in Garanti.
We have entered into a shareholders’ agreement with Doğuş Holding A.Ş. in connection with the Garanti acquisition.
We have entered into a shareholders’ agreement with Doğuş Holding A.Ş. (“Doğuş”) in connection with the Garanti acquisition. Pursuant to the shareholders’ agreement, we and Doğuş have agreed to manage Garanti through the appointment of board members and senior management. Doğuş is one of the largest Turkish conglomerates and has business interests in the financial services, construction, tourism and automotive sectors. Any financial reversal, negative publicity or other adverse circumstance relating to Doğuş could adversely affect Garanti or BBVA. Furthermore, we must successfully cooperate with Doğuş in order to manage Garanti and grow its business. It is possible that we and Doğuş will be unable to agree on the management or operational strategies to be followed by Garanti, which could adversely affect Garanti’s business, financial condition and results of operations and the value of our investment and lead to our failure to achieve the expected benefits from the Garanti acquisition.
Other Risks
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 private 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 and in compliance with IFRS-IASB, 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.
The Public Company Accounting Oversight Board (PCAOB) is currently unable to conduct inspections of our independent registered public accounting firm’s audits and quality controls.
Our independent registered public accounting firm, Deloitte, S.L., is registered with the PCAOB.
Deloitte, S.L. is required by U.S. law to undergo regular PCAOB inspections to assess its compliance with U.S. law and professional standards in connection with its audits of financial
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statements filed with the SEC. However, because our auditor is located in Spain, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Spanish authorities, our auditor is currently not undergoing such PCAOB inspections.
Inspections of other firms that the PCAOB has conducted outside Spain have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in Spain prevents the PCAOB from evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
Accordingly, although our Consolidated Financial Statements were audited in accordance with the standards set forth by the PCAOB, the inability of the PCAOB to conduct inspections of auditors in Spain makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared with auditors outside of Spain that are subject to PCAOB inspections.
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 following the merger of Argentaria into BBV, which was approved by the shareholders of each entity 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, and operates out of Paseo de la Castellana, 81, 28046, Madrid, Spain telephone number +34-91-374-6201. BBVA’s agent in the U.S. for U.S. federal securities law purposes is Sandy Salgado (1345 Avenue of Americas, 45th Floor New York, NY 10105, telephone number +1-212-728-1614). BBVA is incorporated for an unlimited term.
Capital Expenditures
Our principal investments are financial: subsidiaries and affiliates. The main capital expenditures from 2009 to the date of this Annual Report were the following:
2012
Acquisition of Unnim. On March 7, 2012, the Management Commission of the Fund for Orderly Bank Restructuring (Fondo de Restructuración Ordenada Bancaria or “FROB”) accepted BBVA’s offer to acquire Unnim Banc, S.A. (“Unnim”). The FROB, the Deposit Guarantee Fund of Credit Institutions (Fondo de Garantía de Depósitos or “FGD”) and BBVA have entered into a purchase agreement, by virtue of which BBVA will acquire 100% of the shares of Unnim for a purchase price of €1.
In addition, BBVA, the FDG, the FROB and Unnim have signed a “Protocol of Financial Measures” for the restructuring of Unnim, which regulates the Asset Protection Scheme through which the FGD will be responsible for 80% of the losses undergone by a predetermined asset portfolio of Unnim, calculated once the existing provisions on the related assets are applied, for a period of 10 years following the transaction.
The closing of the purchase agreement and the “Protocol of Financial Measures” is subject to obtaining the relevant administrative authorizations and approvals, including the approval of the Bank of Spain, the Finance Secretary of State, the European Commission and the relevant competition authorities. Unnim’s assets as of December 31, 2011 were €29 billion and it reported losses of€469 million for the year ended December 31, 2011.
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Acquisition of a capital holding in the Turkish bank Garanti. On March 22, 2011, through the execution of the agreements signed in November 2010 with the Doğuş group and having obtained the corresponding authorizations, BBVA completed the acquisition of a 24.89% holding of the share capital of Türkiye Garanti Bankasi A.Ş. (“Garanti”). Subsequently, an additional 0.12% holding was acquired through the stock exchanges, increasing the BBVA Group’s total holding in the share capital of Garanti to 25.01% as of December 31, 2011. The total amount spent on these acquisitions totaled $5,876 million (approximately €4,408 million).
The agreements with the Doğuş group include an arrangement for the joint management of the bank and the appointment of some of the members of its Board of Directors by the BBVA Group. BBVA also has a perpetual option to purchase an additional 1% of Garanti, which will become exercisable on March 22, 2016. Considering its current shareholding structure, if the BBVA Group were to exercise this option, it would have effective control of Garanti.
As of December 31, 2011, the goodwill recorded in connection with these acquisitions amounted to €1,262 million (see Note 20.1 to our Consolidated Financial Statements), although this amount is provisional since IFRS 3 grants a period of one year to make a definitive determination. BBVA financed part of this acquisition with funds from the capital increase carried out on November 29, 2010.
Taking into account the aforementioned joint management agreements, this 25.01% holding in Garanti is consolidated in the BBVA Group using the proportionate consolidation method, and its contribution to the BBVA Group as of December 31, 2011, after applying the corresponding standardization and consolidation adjustments, represented 3.06% of the Group’s total assets (€18,309 million) and 2.66% of its total liabilities (€14,850 million) at that date.
The contribution from Garanti to the main items on the consolidated balance sheet as of December 31, 2011, after applying the corresponding standardization and consolidation adjustments, was €4,937 million to various portfolios of financial assets, €11,160 million to “Loans and receivables” and €14,187 million to “Financial liabilities at amortized cost.”
The contribution of Garanti to the BBVA Group’s consolidated income statement from the date of its acquisition to December 31, 2011, after making the corresponding standardization and consolidation adjustments, was €428 million to “Net interest income”, €580 million to “Gross income”, and €193 million to “Net income”. This represents a total of 6.43% of the Group’s consolidated net income in 2011.
If this business combination had been performed at the start of 2011, it is estimated that after the corresponding standardization and consolidation adjustments, Garanti would have contributed €266 million to Group’s consolidated net income for 2011.
Purchase of Credit Uruguay Banco. On January 18, 2011, after obtaining the corresponding authorizations, the purchase of Credit Uruguay Banco was completed for approximately €78 million, generating goodwill for an insignificant amount.
Capital increase in CNCB. BBVA participated in the capital increase carried out by China National Citic Bank (“CNCB”) in 2011, in order to maintain its stake in CNCB (15%), with a payment of €425 million.
On April 1, 2010, after obtaining the corresponding authorizations, the purchase of an additional 4.93% of CNCB’s capital was finalized for €1,197 million. As of December 31, 2010, BBVA had a 29.68% holding in CIFH and a 15% holding in CNCB.
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On August 21, 2009, through our subsidiary BBVA Compass, we acquired certain assets and liabilities of Guaranty from the U.S. Federal Deposit Insurance Corporation (the “FDIC”) through a public auction for qualified investors. BBVA Compass acquired assets, mostly loans, for $11,441 million (approximately€8,016 million) and assumed liabilities, mostly customer deposits, for $12,854 million (approximately €9,006 million). These acquired assets and liabilities represented 1.5% and 1.8% of our total assets and liabilities on the acquisition date.
In addition, the purchase included a loss-sharing agreement with the FDIC under which the latter undertook to assume 80% of the losses on up to the first $2,285 million of the loans purchased by us and up to 95% of the losses, if any, on the loans exceeding this amount. This commitment has a maximum term of either five or ten years, depending on the portfolios.
Capital Divestitures
Our principal divestitures are financial, in subsidiaries and in affiliates. The main capital divestitures from 2009 to the date of this Annual Report were the following:
During 2011, BBVA sold its participation in certain non-strategic associates and also concluded the liquidation and merger of several issuers, financial services and real estate affiliates. Additional information on these transactions is included in Appendix V to the Consolidated Financial Statements.
During 2010, we sold our participations in certain non-strategic associates and also we have concluded the liquidation and merger of several issuers, financial services and real estate affiliates.
During 2009, we sold our participations in certain non-strategic associates (including our 22.9% stake in Air Miles España, S.A.) which gave rise to no significant gains.
As a part of the reorganization process in the United States and Mexico, we concluded the liquidation and merger of several affiliates of BBVA Compass and of BBVA Bancomer.
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 investments in some of Spain’s leading companies.
Business Areas
For fiscal year 2011, we changed the management of our business areas mainly due to the integration of Garanti into the BBVA Group and a new management focus on geographical business areas, instead of a mix of geographical and business activities areas. We believe that, since the beginning of the financial crisis, the importance of the geographical location of businesses in order to make a proper assessment of risks and a better estimate of future growth possibilities has become more evident.
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We currently manage our business areas to focus on five geographical areas: Spain, Mexico, South America, the United States and Eurasia. The changes made in 2011 with respect to the criteria followed in 2010 to reflect the current composition of our business areas are summarized below:
In 2011, the integration of Garanti into BBVA resulted in the creation of a new geographical business area, Eurasia, which includes our investment in Garanti, our Asian operations, including our stake in China National Citic Bank (“CNCB”), and our European business outside of Spain.
The operations of Spain and Portugal were disaggregated. The new Spain business segment excludes the Portuguese business (which is now included in Eurasia) mainly to separate activities in Spain and outside Spain, and includes the global activities related to wholesale banking and asset management, which in 2010 we reported under our former Wholesale Banking and Asset Management (“WB&AM”) business area.
The business areas of Mexico, the U.S. and South America did not change in 2011.
As a result of the above, in 2011 the Group’s businesses have been restructured into the following business areas, which are further broken down into business units, as described below:
Eurasia
Mexico
United States
South America
In addition to these business areas, we continue to have a separate “Corporate Activities” area. This area handles our general management functions, which mainly consist of structural positions for interest rates associated with the euro balance sheet and exchange rates, together with liquidity management and shareholders’ funds. This area also books the costs from central units that have a strictly corporate function and makes allocations to corporate and miscellaneous provisions, such as early retirement and others of a corporate nature. It also includes the Industrial and Financial Holdings Unit and the Group’s Spanish real estate business.
The financial information for our business areas for 2010 and 2009 presented in this Annual Report has been prepared on a uniform basis, consistent with our organizational structure in 2011.
The breakdown of the BBVA Group’s total assets by business segments as of December 31, 2011, 2010 and 2009 is as follows:
Subtotal Assets by Business areas
Corporate Activities
Total Assets BBVA Group
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The following table sets forth information relating the net income attributed to parent company by each of our business areas for the years ended December 31, 2011, 2010 and 2009.
Net Income/(Loss) Attributedto Parent Company
Subtotal Business Areas
Income attributed to the BBVA Group
Income/(Loss) attributed to parent company by each business area for the year ended December 31, 2011 has been affected by the goodwill impairment in the U.S. and the acquisition of Garanti, which have affected, respectively, the contribution of the United States and Eurasia business segments.
The following table sets forth information relating to the income of each business segment for the years ended December 31, 2011, 2010 and 2009:
Operating income(*)
“Gross income” minus “Administration costs” and “Depreciation and amortization”.
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The business area of Spain includes all of BBVA’s banking and non-banking businesses in Spain, other than those included in the Corporate Activities area. The main business units included in this business area are:
Spanish Retail Network: including the segments of individual customers, private banking, small companies and businesses in the domestic market.
Corporate and Business Banking (CBB): which manages small and medium sized enterprises (“SMEs”), companies and corporations, public institutions and developer segments.
Corporate and Investment Banking (C&IB): responsible for business with large corporations and multinationals.
Global Markets (GM): which covers treasury and distribution activities on the Spanish market.
Other units: which include the insurance business unit in Spain (BBVA Seguros), and the Asset Management unit, which manages Spanish mutual fund and pension funds.
The following table sets forth information relating to the activity of this business area for the years ended December 31, 2011, 2010 and 2009:
Total Assets
Of which:
Residential mortgages
Consumer finance
Loans
Credit cards
Loans to enterprises
Loans to public sector
Total customer deposits
Current and savings accounts
Time deposits
Other customers funds
Off-balance sheet funds
Mutual funds
Pension funds
Other placements
Economic capital allocated
As of December 31, 2011, the balance of loans and advances to customers was €214,156 million, a 1.8% decrease from the €218,127 million recorded as of December 31, 2010, as a result of the deleveraging process and weak consumption. The general trend has been a weak turnover, with the most notable decreases recorded in the segment of higher-risk businesses and corporations, and in consumer loans.
As of December 31, 2011, our outstanding payment protection insurance policies amounted to €41 billion and insured approximately 20% of our total loans and advances to customers in Spain as of
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such date. Substantially all of our payment protection insurance products provide consumer or mortgage payment protection in the case of loss of life or disability (while approximately 5% of these products provide protection in the case of unemployment or a work-related illness). These insurance products are granted by our insurance subsidiary to borrowers within our own consumer and mortgage portfolio. Upon the occurrence of the insured event, our insurance subsidiary pays the entire outstanding principal amount, together with any accrued interest, of the related loan. Since the risk remains within the Group, we do not consider our payment protection insurance products when determining the appropriate amount of allowance for loan losses on the related loans. We account for these products as insurance contracts.
As of December 31, 2011, total on-balance and off-balance sheet customer deposits including mutual funds, pension funds and customer portfolios, were€168,330 million, a 1.1% increase from the €166,450 million posted as of December 31, 2010. There were changes in the mix of total customer deposits as a result of turmoil in the markets, which reduced the value of assets under management and led to a change in customer preference from mutual funds to other liability products, particularly promissory notes carrying high fixed levels of interest. Time deposits remained stable due to the high percentage of renewals during the third quarter of 2011.
Customer deposits were €117,174 million as of December 31, 2011 compared to €112,852 as of December 31, 2010, an increase of 3.8%, mainly due to the high percentage of renewals of time deposits during the period.
Mutual fund assets under management were €20,366 million as of December 31, 2011, a 13.1% decrease from the €23,445 million recorded as of December 31, 2010.
As of December 31, 2011, our outstanding guaranteed mutual fund products amounted to €12 billion (approximately 58% of our outstanding mutual fund products in Spain as of such date). Our guaranteed fund products relate mainly to mutual funds in respect of which the return of principal (rather than the yield) is guaranteed by means of a deposit and a derivative contract entered into by us, both of which are recognized on our balance sheet. We account for these products as deposits or derivative contracts.
Pension fund assets under management were €17,212 million as of December 31, 2011, a 2.5% increase from the €16,799 million recorded as of December 31, 2010.
This business area covers the Group’s activity in Europe (excluding Spain) and Asia. Accordingly, it includes BBVA Portugal, Consumer Finance Italy and Portugal, the retail business of branches in Paris, London and Brussels (which in 2010 had been reported under the “Spain and Portugal” business area), and WB&AM activity (comprised of Corporate and Investment Banking, Global Markets and CNCB) within this geographical area. It also covers the Group’s holding in Garanti.
The importance of this area is increasing both in terms of earnings and our balance sheet and, as the rest of the franchises, it has evolved positively and increased the Group’s diversification and growth capacity. The positive contribution of Garanti starting in March 2011 and the increase in earnings from CNCB are worth mentioning in this regard.
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The following table sets forth information relating to the business activity of this business area for the years ended December 31, 2011, 2010 and 2009:
Other customer funds
As of December 31, 2011, the loans and advances to customers was €34,740 million, a 43.1% increase from the €24,281 million recorded as of December 31, 2010, mainly due to the incorporation of Garanti. Excluding the amounts from the Turkish bank, the loan book increased by 3.2%.
As of December 31, 2011 customer deposits were €20,987 million, a 4.5% increase from the €20,078 million as of December 31, 2010, mainly due to the contribution of Garanti, principally of retail deposits (current and saving accounts and time deposits), which was partially offset by the decrease in wholesale funds, which affected mainly the European branches (in London, Frankfurt and Brussels).
The Mexico business area comprises the banking, pension and insurance businesses conducted in Mexico by the BBVA Bancomer financial group. The business units included in the Mexico area are:
Retail and Corporate banking, and
Pensions and Insurance.
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As of December 31, 2011, the balance of loans and advances to customers was €36,205 million, a 0.9% decrease from the €36,526 million as of December 31, 2010 mainly due to the decrease in wholesale lending as a result, among others, of the early payment by the Federal Government of a credit line underwritten by several banks (including us) in the country, and the switch made by large corporations from bank lending to financing in wholesale markets due to the low interest rates.
As of December 31, 2011, customer deposits were €37,704 million, a 0.9% decrease from the €38,051 million recorded as of December 31, 2010, due to the exchange rate effect. Excluding this effect, there was an increase of 8.1%.
Mutual fund assets under management were €15,612 million as of December 31, 2011, a 1.8% increase from the €15,341 million recorded as of December 31, 2010.
Pension fund assets under management were €13,132 million as of December 31, 2011, a 2.8% increase from the €12,781 million recorded as of December 31, 2010, due to the positive performance of Afore Bancomer, which continued to perform well as result of the stability of the Mexican labor market.
The South America business area manages the BBVA Group’s banking, pension and insurance businesses in the region. In 2011, Credit Uruguay (which was purchased in January 2011 and merged with BBVA Uruguay in May 2011) was incorporated. In addition, we sold the Group’s holding in the insurance company Consolidar Retiro of Argentina. Finally, we acquired an additional 24.5% stake in Forum (a leading vehicle financing company in Chile) in September 2011.
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The business units included in the South America business area are:
Retail and Corporate Banking: includes banks in Argentina, Chile, Colombia, Panama, Paraguay, Peru, Uruguay and Venezuela.
Pension businesses: includes pension businesses in Bolivia, Chile, Colombia, Ecuador and Peru.
Insurance businesses: includes insurance businesses in Argentina, Chile, Colombia, and Venezuela.
As of December 31, 2011, the loans and advances to customers were €40,219 million, a 27.6% increase from the €31,512 million recorded as of December 31, 2010. All countries in this business area have seen growth, with significant increases in consumer finance, cards and small companies and businesses.
As of December 31, 2011, customer deposits were€45,776 million, a 26.9% increase from the €36,085 million recorded as of December 31, 2010. Lower-cost transactional deposits such as current and savings accounts increased by 35.3%, which explains a portion of the improvement in net interest income.
Off-balance sheet funds, however, fell by 2.3% as a result of turmoil in the markets.
This business area encompasses the Group’s business in the United States and Puerto Rico. BBVA Compass accounted for approximately 82% of the area’s balance sheet as of
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December 31, 2011. Given its weight, most of the comments below refer to BBVA Compass. This business area also covers the assets and liabilities of the BBVA office in New York, which specializes in transactions with large corporations.
The business units included in the United States business area are:
BBVA Compass Banking Group, and
Other units: BBVA Puerto Rico and Bancomer Transfers Services (“BTS”).
As of December 31, 2011, loans and advances to customers were €40,069 million, a 1.3% increase from the €39,570 million recorded as of December 31, 2010. In 2011, we have continued to aim for the selective growth of lending in BBVA Compass, with a change in the portfolio mix towards items with less cyclical risk (such as loans to the commercial and industrial sector) and reducing higher risk portfolios (such as construction real estate loans).
As of December 31, 2011, customer deposits were €36,664 million, an 11.3% decrease from €41,354 million as of December 31, 2010. In 2011, there was an improvement in the structure of the balance sheet as a result of the decrease in high-interest deposits and an increase in non-interest accounts.
Monetary Policy
The integration of Spain into the European Monetary Union (“EMU”) on January 1, 1999 implied the yielding of monetary policy sovereignty to the Eurosystem. The “Eurosystem” is composed of the ECB and the national central banks of the 17 member countries that form the EMU.
The Eurosystem determines and executes the policy for the single monetary union of the 17 member countries of the EMU. The Eurosystem 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 carried out by the Eurosystem include:
defining and implementing the single monetary policy of the EMU;
conducting foreign exchange operations in accordance with the set exchange policy;
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lending to national monetary financial institutions in collateralized operations;
holding and managing the official foreign reserves of the member states; and
promoting the smooth operation of the payment systems.
In addition, the Treaty on European Union (“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.
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 ICO and as a regulator retaining an important role in the regulation and supervision of financial institutions.
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”.
Since January 1, 1999, the Bank of Spain has performed the following basic functions attributed to the Eurosystem:
defining and implementing the Eurosystem’s monetary policy, with the principal aim of maintaining price stability across the euro area;
conducting currency exchange operations consistent with the provisions of Article 111 of the EU Treaty, and holding and managing the Member States’ official currency reserves;
promoting the sound working of payment systems in the euro area; and
issuing legal tender banknotes.
Recognizing the foregoing functions as a fully-fledged member of the Eurosystem, the Bank of Spain Law of Autonomy (Ley de Autonomía del Banco de España) stipulates the performance of the following functions by the Bank of Spain:
holding and managing currency and precious metal reserves not transferred to the ECB;
supervising the solvency and behavior of credit institutions, other entities and financial markets, for which it has been assigned supervisory responsibility, in accordance with the provisions in force;
promoting the sound working and stability of the financial system and, without prejudice to the functions of the ECB, of national payment systems;
placing coins in circulation and the performance, on behalf of the State, of all such other functions entrusted to it in this connection;
preparing and publishing statistics relating to its functions, and assisting the ECB in the compilation of the necessary statistical information;
providing treasury services and acting as financial agent for government debt;
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advising the government, preparing the appropriate reports and studies; and
exercising all other powers attributed to it by legislation.
Subject to the rules and regulations issued by the Ministry of Economy, the Bank of Spain has the following supervisory powers over Spanish banks:
conducting periodic inspections of Spanish banks to evaluate a bank’s compliance with current regulations including the preparation of financial statements, account structure and credit policies;
advising a bank’s board of directors and management on its dividend policy;
undertaking extraordinary inspections of banks; and
collaborating with other regulatory entities to impose penalties for infringement or violation of applicable regulations.
Deposit Guarantee Fund of Credit Institutions
The Deposit Guarantee Fund of Credit Institutions (Fondo de Garantía de Depósitos or “FGD”), which operates under the guidance of the Bank of Spain, was set up by virtue of Royal Decree-Law 16/2011, of October 14. It is an independent legal entity and enjoys full authority to fulfill its functions. Royal Decree-Law 16/2011 unified the three previous guarantee funds that existed in Spain: the Deposit Guarantee Fund of Saving Banks, the Deposit Guarantee Fund of Credit Entities and the Deposit Guarantee Fund of Banking Establishments.
The main objective of the FGD is to guarantee deposits and securities held by credit institutions, up to the limit of €100,000. It also has the authority to carry out any such actions necessary to reinforce the solvency and operation of credit institutions in difficulty, with the purpose of defending the interests of depositors and deposit guarantee funds.
The FGD is funded by annual contributions from member banks. The rate of our contributions in 2011 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 our clients’ behalf. Pursuant to Royal Decree-Law 19/2011, starting in 2012, our contribution will be equal to 0.2% of the year-end amount of bank deposits to which the guarantee extends and 0.06% over the 5% of the securities held on our clients’ behalf.
In addition, pursuant to Royal Decree-Law 771/2011, during 2011 an additional contribution was made in connection with deposits the remuneration of which exceeded the level established by the Bank of Spain in its Circular 3/2011, of June 30.
As of December 31, 2011, all of the Spanish banks belonging to the BBVA Group were members of the FGD and thus obligated to make annual contributions to it.
Investment Guarantee Fund
Royal Decree 948/2001, of August 3, regulates investor guarantee schemes (Fondo de Garantía de Inversores) 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.
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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 Union monetary policy, effective January 1, 1999, the ECB and the national central banks of the member states of the 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 European System of Central Banks (“ESCB”). Qualifying liabilities for this purpose include:
deposits;
debt securities issued; and
monetary market instruments.
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.
Fund for Orderly Bank Restructuring
The crisis that has affected the financial markets since 2007 obliged the Spanish authorities to create the Fund for Orderly Bank Restructuring (Fondo de Restructuración Ordenada Bancaria or “FROB”) by Decree-Law 9/2009, of June 26. Its purpose is to help the restructuring processes undertaken by credit institutions and strengthen their capital positions subject to certain conditions. The FROB will support the restructuring strategy of those institutions that require assistance, in three distinct stages:
search for a private solution by the credit institution itself;
adopt measures to tackle any weaknesses that may affect the viability of credit institutions; and
initiate a restructuring process in which the Fund itself has to intervene directly.
The FROB has to act in what is an absolutely exceptional situation that is closely linked to the development of the financial crisis. In order to comply with its objectives, FROB will be funded jointly from the Spanish national budget and the FDG. The FROB will be able to raise funds on securities markets through the issue of debt securities, lending and engaging in any other debt transaction necessary to fulfill its objects.
Capital Requirements
Bank of Spain Circular 3/2008 (“Circular 3/2008”), of May 22, on the calculation and control of minimum capital requirements, regulates the minimum capital requirements for Spanish credit
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institutions, on an individual and consolidated group basis, and sets forth how to calculate capital meeting such requirements, as well as the various internal capital adequacy assessment processes credit institutions should have in place and the information they should disclose to the market.
Circular 3/2008 is the final implementation, for credit institutions, of the legislation on capital and consolidated supervision of financial institutions, which was contained in Law 36/2007, of November 16, amending Law 13/1985, of May 25, on the investment ratios, capital and reporting requirements of financial intermediaries, and other financial regulations, which also includes Royal Decree 216/2008, of February 15, on the capital of financial institutions. Circular 3/2008 also conforms Spanish legislation to Directive 2006/48/EC of the European Parliament and of the Council, of June 14, 2006, and Directive 2006/49/EC of the European Parliament and of the Council, of June 14, 2006. The minimum capital requirements for credit institutions and their consolidated groups were thoroughly revised in both EC directives based on the Capital Accord adopted by the Basel Committee on Banking Supervision (“Basel II”).
The minimum capital requirements established by Circular 3/2008 are calculated on the basis of the Group’s exposure (i) to credit risk and dilution risk (on the basis of the assets, obligations and contingent exposures and commitments that present these risks, depending on their amounts, characteristics, counterparties, guarantees, etc.); (ii) to counterparty risk and position and settlement risk in the trading book; (iii) to foreign exchange risk (on the basis of the overall net foreign currency position); and (iv) to operational risk. Additionally, the Group is subject to compliance with the risk concentration limits established in Circular 3/2008 and with the requirements related to corporate governance, internal capital adequacy assessment, measurement of interest rate risk and certain additional public disclosure obligations set forth therein. With a view to ensuring compliance with the aforementioned objectives, the Group performs integrated management of these risks, in accordance with its internal policies. See Note 7 to the Consolidated Financial Statements.
As of December 31, 2011, 2010 and 2009, the eligible capital of the Group exceeded the minimum required under the regulations then in force. See Note 33 to the Consolidated Financial Statements.
Under Basel II calculation of the minimum regulatory capital requirements under the standards, referred to as “Pillar 1”, is supplemented with an internal capital adequacy assessment and supervisory review process, referred to as “Pillar 2”. The Group’s internal capital adequacy assessment process is based on the internal model for the quantification of the economic capital required on the basis of the Group’s overall risk profile. Finally, Basel II standards establish, through what is referred to as “Pillar 3”, strict transparency requirements regarding the information on risks to be disclosed to the market.
Circular 3/2008 was modified by Circular 9/2010, of December 22, and Circular 4/2011, of November 30, in order to proceed with the implementation in Spain of the changes to the solvency framework approved at a European level and known as CRD II (Directive 2009/27/EC, of April 7, Directive 2009/89/EC of July 27 and Directive 2009/111/EC, of September 16) and CRD III (Directive 2010/76/EU, of November 24).
The main changes considered in these directives are:
European harmonization of large exposures limits: a bank will be restricted in lending beyond a certain limit (25% of regulatory capital) to any one party.
Obligation to establish and maintain, for categories of staff whose professional activities have a material impact on the risk profile of a bank, remuneration policies and practices that are consistent with effective risk management.
Improved quality of banks’ capital: additional loss absorbency criteria for hybrid capital instruments have been introduced, anticipating Basel III recommendations.
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Improved liquidity risk management: for banking groups that operate in multiple countries, their liquidity risk management—i.e. how they fund their operations on a day-to-day basis—will also be discussed and coordinated within ‘colleges of supervisors’.
Improved risk management for securitized products: rules on securitized debt—the repayment of which depends on the performance of a dedicated pool of loans—have been tightened. Firms that re-package loans into tradable securities will be required to retain some risk exposure to these securities, while firms that invest in the securities will be allowed to make their decisions only after conducting comprehensive due diligence. If they fail to do so, they will be subject to capital penalties.
Strengthened capital requirements have been introduced to cover risks in the trading book and related to re-securitizations, following Basel 2.5 agreement.
As part of a wider plan of the Spanish Government for the strengthening of the financial sector, the Royal Decree-Law 2/2011, of February 18 (“RD-L 2/2011”), established new stricter minimum capital requirements for Spanish credit institutions, with a new capital requirement (“capital principal”) for all credit institutions of a minimum of 8%. This ratio will be 10% for those institutions that are not listed on an stock exchange, which have a small presence of private investors, and are dependent upon wholesale funding markets for over 20% of their assets, since they have more limited access to the capital markets. Entities with capital shortages were forced to implement a strategy for closing any detected capital gap in 2011, with the FROB acting as a backstop, in the event of a failure to cover the capital needs through the market.
The entry into force of RD-L 2/2011 opened up a new stage in the process of restructuring and strengthening of the Spanish savings banks. The focus was on recapitalizing institutions that need more capital and encouraging savings banks to merge or to transfer their financial activity to a bank to ease their access to capital markets and wholesale funding. These restructuring and recapitalization processes should ease compliance with Basel III, or at least Basel III-2013, even if some differences exist between the RD-L 2/2011 and the Basel III capital standards.
RD-L 2/2011’s “capital principal” is largely composed of the same items as those considered in the Basel III accord, that is, capital instruments, share premiums, reserves and minority interests. In addition, losses, intangibles and negative value adjustments are deducted in both definitions. The differences between the definitions set forth in RD-L 2/2011 and Basel III relate to the treatment of some deductions, such as investments in financial institutions.
As shown below, we fulfilled the minimum capital requirements as required by RD-L 2/2011 as of December 31, 2011 and December 31, 2010:
Minimum required
December 2011(1)
December 2010
The decrease in capital ratios as of December 31, 2011 was mainly due to the acquisition of Garanti (see “Item 4. Information on the Company—History and Development of the Company”).
The new Royal Decree-Law 2/2012, of February 3 (“RD-L 2/2012”), introduces, among other measures, a capital buffer requirement, in terms of “Capital Principal”, equal to 20% of an entity’s problematic credit assets and foreclosed real estate assets. The deadline for complying with this new requirement is December 31, 2012. We believe BBVA will meet this new requirement as of December 31, 2012.
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In addition, we believe we will meet the EBA’s new minimum capital recommendations referred to in “Item 3. Key Information—Risk Factors—Risks Relating to Us and Our Business—We are subject to substantial regulation, and regulatory and governmental oversight. Adverse regulatory developments or changes in government policy could have a material adverse effect on our business, results of operations and financial condition,” as of June 30, 2012.
Capital Management
Basel Capital Accord—Basel II—Economic Capital
The Group’s capital management is performed at both the regulatory and economic levels.
Regulatory capital management is based on the analysis of the capital base and the capital ratios (core capital, Tier 1, etc.) using Basel (“BIS”) and Bank of Spain criteria. See Note 33 to the Consolidated Financial Statements.
The aim is to achieve a capital structure that is as efficient as possible in terms of both cost and compliance with the requirements of regulators, ratings agencies and investors. Active capital management includes securitizations, sales of assets, and preferred and subordinated issues of equity and hybrid instruments.
The Bank has obtained the Bank of Spain’s approval with respect to its internal model of capital estimation (“IRB”) concerning certain portfolios and its operational risk internal model.
From an economic standpoint, capital management seeks to optimize value creation at the Group and at its different business units.
The Group allocates economic capital (“CER”) commensurate with the risks incurred by each business. This is based on the concept of unexpected loss at a certain level of statistical confidence, depending on the Group’s targets in terms of capital adequacy. These targets are applied at two levels: the first is core equity, which determines the allocated capital. The Group uses this amount as a basis for calculating the return generated on the equity (“ROE”) in each business. The second level is total capital, which determines the additional allocation in terms of subordinated debt and preference shares. The CER calculation combines lending risk, market risk (including structural risk associated with the balance sheet and equity positions), operational risk and fixed asset and technical risks in the case of insurance companies.
Stockholders’ equity, as calculated under BIS rules, is an important metric for the Group. However, for the purpose of allocating capital to business areas the Group prefers CER. It is risk-sensitive and thus better reflects management policies for the individual businesses and the business portfolio. These provide an equitable basis for assigning capital to businesses according to the risks incurred and make it easier to compare returns.
To internal effects of management and pursuit of the business areas, the Group realizes a capital allocation to each business area.
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 non-consolidated companies of the economic group) of a bank’s or group’s regulatory capital.
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Legal and Other Restricted Reserves
We are subject to the legal and other restricted reserves requirements applicable to Spanish companies. Please see “—Capital Requirements”.
Allowance for Loan Losses
For a discussion of allowances for loan losses and country risk, see Note 2.2.1 to the Consolidated Financial Statements.
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, of November 22, 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 2.2.12 and Note 26 to the Consolidated Financial Statements.
Dividends
If a bank meets the Bank of Spain’s minimum capital requirements described above under “—Capital 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. 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. Our 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 income attributed to parent company 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
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Bank of Spain had asked that banks consult with it on a voluntary basis before declaring interim dividends. It should be noted that the Bank of Spain recommended in 2008 to Spanish banks general moderation on the distribution of dividends, to increase their voluntary reserves in order to strengthen their financial situation and to distribute any dividends in treasury stock.
Our bylaws allow for dividends to be paid in cash or in kind as determined by shareholder resolution.
Scrip Dividend
During 2011, a scrip dividend scheme called “Dividendo Opción” was successfully implemented as approved by the shareholders’ general meeting held on March 11, 2011. In line with the 2011 “Dividendo Opción” scheme, the BBVA annual shareholders’ general meeting held on March 16, 2012, passed a resolution adopting two different free-of-charge capital increases for the implementation of a new “Dividendo Opción” scheme for this year.
Upon the execution of each such free-of-charge capital increase, BBVA shareholders will have the option to receive all or part of their remuneration in newly issued free-of-charge shares or to receive all of their remuneration in cash. For additional information on the “Dividendo Opción” scheme, including its tax implications, see “Item 10. Additional Information—Taxation—Spanish Tax Considerations—Taxation of Dividends—Scrip Dividend”.
The “Dividendo Opción” is implemented as an alternative remuneration scheme for BBVA shareholders with the aim to provide BBVA shareholders with a flexible option to receive newly issued shares of the Bank, without thereby altering BBVA’s cash remuneration policy, in line with the current trend that is being put into practice by other entities in the domestic and international markets.
Shareholders will have the “Dividendo Opción” available to them on two different dates in 2012, coinciding with the dates on which dividends have been historically paid out. However, it should be noted that each capital increase is independent of the other, such that either one may be executed on different dates and either one, or both, may not be made.
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
Law 2/1981, of March 25, on mortgage market, as amended by Law 41/2007, regulates the different aspects of the Spanish mortgage market and establishes additional rules for the mortgage and financial system.
Royal Decree 716/2009, of April 24, implements several aspects of Law 2/1981, of March 25. The most significant aspects implemented by Royal Decree 716/2009 are, among others, (i) the modification on the loan-to-value ratio requirement intending to improve the quality of Spanish mortgage-backed securities; (ii) the elimination of many of the administrative requirements for the issuance of covered bonds and mortgage bonds; and (iii) the implementation of a special accounting record of the loans and credit facilities used to back issuances of covered bonds and mortgage-backed bonds.
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Mutual Fund Regulation
Mutual funds in Spain are regulated by the Ministry of the Economy (Dirección General del Tesoro y Política Financiera del Ministerio de Economía) and by the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores or “CNMV”). All mutual funds and mutual fund management companies are required to be registered with the CNMV. Spanish mutual funds may be 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.
Reform of the Spanish Corporate Enterprises Act
The consolidated text of the Corporate Enterprises Act adopted under Legislative Royal Decree 1/2010, of July 2, has repealed the former Companies Act, adopted under Legislative Royal Decree 1564/1989, of December 22. This royal legislative decree stems from the authorization set out in the Law 3/2009, of April 3, on structural changes in companies, enabling the Government to proceed to consolidate the legislation for joint stock (“sociedades anónimas”) and limited liability (“sociedades de responsabilidad limitada”) in a single text, bringing together the contents of the two aforementioned acts, as well, the part of the Securities Exchange Act that regulates the most purely corporate-related aspects of joint stock companies whose securities are traded on an official secondary market. The consolidated text also includes the articles of the Commercial Code that address limited partnerships, a derivative corporate device that is barely used in practice. Law 25/2011, of August 1, partially amended the Corporate Enterprises Act and incorporated Directive 2007/36/EC, of July 11, on the exercise of certain rights of shareholders in listed companies.
Reform of the Spanish Auditing Law
Law 12/2010, of June 30, amended Law 19/1988, of July 12, on Accounts Audit, Law 24/1988, of July 28, on Securities Exchanges and the consolidated text of the former Companies Act adopted by Legislative Royal Decree 1564/1989, of December 22 (currently, the Corporate Enterprises Act), for its adaptation to EU regulations. This law transposed Directive EU/2006/43 which regulates aspects, among others, related to: authorization and registry of auditors and auditing companies, confidentiality and professional secrecy which the auditors may observe, rules on independency and liability as well as certain rules on the composition and functions of the auditing committee. The Royal Decree 1/2011, of July 1, approved the consolidated text of the Accounts Audit Law.
U.S. Regulation
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, BBVA 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 banking activities and certain non-banking activities that are “closely related to banking,” as determined by the Federal Reserve, and certain other activities permitted under the BHC Act. BBVA also is 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 may result in a requirement for BBVA, as controlling shareholder, to inject capital into any of its U.S. bank subsidiaries.
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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 branch is licensed and supervised by the New York State Department of Financial Services. Each of BBVAPR Holding Corporation, a direct subsidiary of BBVA, BBVA USA Bancshares, Inc., a direct subsidiary of BBVA, and its wholly-owned subsidiary, BBVA Compass Bancshares, Inc., an indirect subsidiary of BBVA, is considered a bank holding company within the meaning of the BHC Act and is subject to supervision and regulation by the Federal Reserve. Compass Bank is an Alabama state-chartered bank, is a member of the Federal Reserve System, and has branches in Alabama, Arizona, California, Colorado, Florida, New Mexico, and Texas. Compass Bank is supervised and examined by the Federal Reserve and the State of Alabama Banking Department. In addition, certain aspects of Compass Bank’s branch operations in Arizona, California, Colorado, Florida, New Mexico, and Texas are subject to examination by their respective state banking regulators in such states. Banco Bilbao Vizcaya Argentaria Puerto Rico (“BBVA Puerto Rico”) is a bank chartered and supervised by the Oficina del Comisionado de Instituciones Financieras de Puerto Rico. Compass Bank and BBVA Puerto Rico are also depository institutions insured by, and subject to the regulation of, the Federal Deposit Insurance Corporation.
BBVA Bancomer, S.A. agency office in Houston, Texas is a non-FDIC insured agency office of BBVA Bancomer, S.A., an indirect subsidiary of BBVA, that is licensed under the laws of the State of Texas and supervised by the Texas Department of Banking and the Federal Reserve.
Bancomer Transfer Services, Inc., a non-banking affiliate of BBVA and a direct subsidiary of BBVA Bancomer USA, Inc., is licensed as a money transmitter by the State of California Department of Financial Institutions, the Texas Department of Banking, and certain other state regulatory agencies. Bancomer Transfer Services, Inc. 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 certain of 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 existing compliance programs under the Bank Secrecy Act and regulations of the Office of Foreign Assets Control. 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 regulation and supervision by the SEC and the Financial Industry Regulatory Authority (FINRA) with respect to their securities activities, as well as various U.S. state regulatory authorities. Additionally, the securities underwriting and dealing activities of BBVA’s indirect U.S. broker-dealer subsidiary, BBVA Securities, Inc., are subject to regulation and supervision by the Federal Reserve.
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The activities of the Group’s U.S. investment adviser affiliates are regulated and supervised by the SEC.
In addition, the Group’s U.S. insurance agency affiliates are subject to regulation and supervision by various U.S. state insurance regulatory authorities.
Dodd-Frank Act
On July 21, 2010, the United States enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which provides a broad framework for significant regulatory changes that will extend to almost every area of U.S. financial regulation. The Dodd-Frank Act addresses, among other issues, systemic risk oversight, bank capital standards, the liquidation of failing systemically significant U.S. financial institutions, over-the-counter derivatives, restrictions on the ability of banking entities to engage in proprietary trading activities and invest in hedge funds and private equity funds (known as the “Volcker Rule”), consumer and investor protection, hedge fund registration, municipal advisor registration and regulation, securitization, investment advisor registration and regulation and the role of credit-rating agencies. Compass Bank has registered with the SEC and the Municipal Securities Rulemaking Board as a municipal advisor pursuant to the Dodd-Frank Act’s municipal advisor registration requirements.
Various U.S. regulators are implementing the Dodd-Frank Act through detailed rulemaking that will likely continue for several years. Once it is fully implemented, the Dodd-Frank Act and related rules are expected to result in additional costs and impose certain limitations and restrictions affecting the conduct of our businesses, although uncertainty remains about the final details, impact and timing of many of the rules.
Among other changes, the Dodd-Frank Act requires that the Federal banking agencies, including the Federal Reserve, establish minimum leverage and risk-based capital requirements applicable to insured depository institutions, bank and thrift holding companies and systemically important non-bank financial companies. These minimum requirements must be not less than the generally applicable risk-based capital and leverage capital requirements, and not quantitatively lower than the requirements in effect for insured depository institutions as of the date of enactment of the Dodd-Frank Act. In response to these requirements, the Federal banking agencies have adopted a rule effectively establishing a permanent capital floor for covered institutions equal to the risk-based capital requirements under the banking agencies’ Basel I capital adequacy guidelines. It is anticipated that additional rules will be proposed and adopted pursuant to the Dodd-Frank Act’s minimum capital provisions, including adjustments to minimum capital requirements in response to further revisions and refinements to the international standards adopted by the Basel Committee on Banking Supervision.
The Dodd-Frank Act also provides Federal banking agencies with tools to impose greater capital, leverage and liquidity requirements and other prudential standards for financial institutions that pose significant systemic risk and bank holding companies with greater than $50 billion in assets. In January 2012, the Federal Reserve proposed extensive rules to implement these enhanced supervisory and prudential requirements, including additional capital and leverage requirements, additional liquidity requirements, limits on single counterparty exposure, risk management and risk committee requirements, more stringent stress testing requirements and various mandatory remediation actions under certain circumstances. The rules proposed by the Federal Reserve to date are not directly applicable to foreign bank holding companies, such as BBVA, but are applicable to U.S.-based bank holding companies with consolidated assets in excess of $50 billion, including BBVA USA Bancshares, Inc. The Federal Reserve has announced that it is actively developing a proposed framework for applying the Dodd-Frank Act’s enhanced prudential standards and early remediation requirements to foreign banking organizations. In applying its enhanced prudential standards rulemaking to foreign
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bank holding companies, the Federal Reserve is required to take into account the principle of national treatment and equality of competitive opportunity, and the extent to which the foreign bank holding company is subject to comparable home country standards.
Under capital plan and stress test rules adopted by the Federal Reserve, BBVA USA Bancshares, Inc. is required to conduct periodic stress tests and submit an annual capital plan to the Federal Reserve for review, which must, among other things, include a description of planned capital actions and demonstrate the company’s ability to maintain minimum capital above existing minimum capital ratios and above a Tier 1 common equity-to-total risk-weighted asset ratio of 5% under both expected and stressed conditions over a minimum nine-quarter planning horizon.
The Dodd-Frank Act’s Volcker Rule also limits the ability of banking entities, except solely outside the United States in the case of non-U.S. banking entities, to sponsor or invest in private equity or hedge funds and to engage in certain types of proprietary trading unrelated to serving clients. U.S. regulators have proposed rules implementing the statute. The Dodd-Frank Act also changes the Federal Deposit Insurance Corporation (“FDIC”) deposit insurance assessment framework (the amounts paid by FDIC-insured institutions into the deposit insurance fund of the FDIC), primarily by basing assessments on an FDIC-insured institution’s total assets less tangible equity rather than on U.S. domestic deposits, which is expected to shift a greater portion of the aggregate assessments to large banks (such as Compass Bank).
Under the so-called swap “push-out” provisions of the Dodd-Frank Act, the derivatives activities of U.S. banks (such as Compass Bank) and U.S. branch offices of foreign banks (such as BBVA’s New York branch) will be restricted, which may necessitate changes to how we conduct our derivatives activities. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants will be required to register with the SEC, the U.S. Commodity Futures Trading Commission, or both, and will become subject to additional requirements relating to capital, margin, business conduct, and recordkeeping, among others.
There are various qualitative and quantitative restrictions on the extent to which BBVA and its non-bank subsidiaries can borrow or otherwise obtain credit from their U.S. banking affiliates or engage in certain other transactions involving those subsidiaries. In general, these transactions must be on terms that would ordinarily be offered to unaffiliated entities, must be secured by designated amounts of specified collateral and are subject to quantitative limitations. These restrictions also apply to certain transactions of our New York Branch with our U.S. broker-dealer affiliates and certain of our other affiliates. Effective in July 2012, the Dodd-Frank Act subjects credit exposure arising from derivative transactions, securities borrowing and lending transactions, as well as repurchase/reverse repurchase agreements to the above-mentioned collateral and quantitative limitations.
Regulations that may be adopted by the Consumer Financial Protection Bureau, established under the Dodd-Frank Act, could affect the nature of the activities which a bank (including Compass Bank) may conduct, and may impose restrictions and limitations on the conduct of such activities.
Furthermore, the Dodd-Frank Act requires issuers with listed securities, which may include foreign private issuers such as BBVA, to establish a “clawback” policy to recoup previously awarded employee compensation in the event of an accounting restatement. The Dodd-Frank Act also grants the SEC discretionary rule-making authority to impose a new fiduciary standard on brokers, dealers and investment advisers, and expands the extraterritorial jurisdiction of U.S. courts over actions brought by the SEC or the United States with respect to violations of the antifraud provisions in the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.
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Organizational Structure
As of December 31, 2011, the BBVA Group was made up of 293 fully consolidated and 27 proportionately consolidated companies, as well as 73 companies consolidated using the equity method.
The companies are principally 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. In addition, BBVA has an active presence in Asia.
Below is a simplified organizational chart of BBVA’s most significant subsidiaries as of December 31, 2011.
Subsidiary
BBVA BANCOMER, S.A. DE C.V.
COMPASS BANK
BANCO BILBAO VIZCAYA ARGENTARIA CHILE, S.A.
BANCO CONTINENTAL, S.A.
BBVA SEGUROS, S.A. DE SEGUROS Y REASEGUROS
BBVA COLOMBIA, S.A.
BANCO PROVINCIAL S.A. – BANCO UNIVERSAL
BANCO BILBAO VIZCAYA ARGENTARIA (PORTUGAL), S.A.
BBVA BANCO FRANCES, S.A.
BANCO BILBAO VIZCAYA ARGENTARIA PUERTO RICO, S.A.
PENSIONES BANCOMER, S.A. DE C.V.
SEGUROS BANCOMER, S.A. DE C.V.
BANCO BILBAO VIZCAYA ARGENTARIA (PANAMA), S.A.
BBVA SUIZA, S.A. (BBVA SWITZERLAND)
UNO-E BANK, S.A.
BBVA PARAGUAY, S.A.
D. Property, Plants and Equipment
We own and rent a substantial network of properties in Spain and abroad, including 3,016 branch offices in Spain and, principally through our various affiliates, 4,441 branch offices abroad as of December 31, 2011. As of December 31, 2011, approximately 84% of our branches in Spain and 58% of our branches abroad were rented from third parties pursuant to short-term leases that may be renewed by mutual agreement.
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BBVA, through a real estate company of the Group, is constructing its new corporate headquarters at a development area in the north of Madrid (Spain). As of December 31, 2011, the accumulated investment for this project amounted to € 528 million.
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
Cash and balances with central banks
Debt securities, equity instruments and derivatives
Loans and receivables
Loans and advances to credit institutions
In euros(2)
In other currencies(3)
Other financial income
Non-earning assets
Total average assets
Rates have been presented on a non-taxable equivalent basis.
Amounts reflected in euro correspond to predominantly domestic activities.
Amounts reflected in other currencies correspond to predominantly foreign activities.
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LIABILITIES
Deposits from central banks and credit institutions
Other financial costs
Non-interest-bearing liabilities
Equity
Total average liabilities
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 2011 compared to 2010, and 2010 compared to 2009. 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.
Interest income
In euros
In other currencies
Total income
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Interest expense
Total expense
Variances caused by changes in both volume and rate have been allocated proportionally to volume and rate.
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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.
Average interest earning assets
Gross yield(1)
Net yield(2)
Net interest margin (3)
Average effective rate paid on all interest-bearing liabilities
Spread(4)
Gross yield represents total interest income divided by average interest earning assets.
Net yield represents total interest income divided by total average assets.
Net interest margin represents net interest income as percentage of average interest earning assets.
Spread is the difference between gross yield and the average cost of interest-bearing liabilities.
Interest-Bearing Deposits in Other Banks
As of December 31, 2011, interbank deposits represented 3.9% of our assets. Of such interbank deposits, 34.9% were held outside of Spain and 65.1% 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, 2011, our securities were carried on our consolidated balance sheet at a carrying amount of €92,272 million, representing 15.4% of our assets. €30,115 million, or 32.6%, of our securities consisted of Spanish Treasury bonds and Treasury bills. The average yield during 2011 on investment securities that BBVA held was 4.6%, compared to an average yield of approximately 5.3% earned on loans and receivables during 2011. The market or appraised value of our total securities portfolio as of December 31, 2011, was €91,507 million. See Notes 10, 12 and 14 to the Consolidated Financial Statements. For a discussion of our investments in affiliates, see Note 17 to the Consolidated Financial Statements. For a discussion of the manner in which we value our securities, see Notes 2.2.1 and 8 to the Consolidated Financial Statements.
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The following tables analyze the carrying amount and market value of debt securities as of December 31, 2011, December 31, 2010 and December 31, 2009, respectively. Trading portfolio is not included in the tables below because the amortized costs and fair values of these items are the same. See Note 10 to the Consolidated Financial Statements.
DEBT SECURITIES -
AVAILABLE FOR SALE PORTFOLIO
Domestic
Spanish Government and other government agency debt securities
Other debt securities
Issued by central banks
Issued by credit institutions
Issued by other institutions
International
Mexican Government and other government agency debt securities
U.S. Treasury and other U.S. government agencies debt securities
States and political subdivisions
Other countries
Securities of other foreign Governments
TOTAL AVAILABLE FOR SALE PORTFOLIO
HELD TO MATURITY PORTFOLIO
TOTAL HELD TO MATURITY PORTFOLIO
TOTAL DEBT SECURITIES
Fair values for listed securities are determined on the basis of their quoted values at the end of the period. Appraised values are used for unlisted securities based on our estimates and valuation techniques. See Note 8 to the Consolidated Financial Statements.
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DEBT SECURITIES
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Fair values for listed securities are determined on the basis of their quoted values at the end of the period. Appraised values are used for unlisted securities based on our estimates and valuation techniques. See Note 8 to the Consolidated Financial Statements. As of December 31, 2011 the carrying amount of the debt securities classified within the available for sale portfolio and the held to maturity portfolio by rating categories, were as follows:
AAA
AA+
AA
AA-
A+
A
A-
With rating BBB+ or below
Non-rated
TOTAL
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The following tables analyze the carrying amount and market value of our ownership of equity securities as of December 31, 2011, 2010 and 2009, respectively. Trading portfolio and investments in affiliated companies consolidated under the equity method are not included in the tables below because the amortized costs and fair values of these items are the same. See Note 10 to the Consolidated Financial Statements.
EQUITY SECURITIES
Equity listed
Equity unlisted
TOTAL EQUITY SECURITIES
TOTAL INVESTMENT SECURITIES
Fair values for listed securities are determined on the basis of their quoted values at the end of the year. Appraised values are used for unlisted securities based on our estimates or on unaudited financial statements, when available.
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The following table analyzes the maturities of our debt investment and fixed income securities, excluding trading portfolio, by type and geographical area as of December 31, 2011.
AVAILABLE-FOR-SALE PORTFOLIO
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Securities of other foreign Governments (2)
TOTAL AVAILABLE-FOR-SALE
HELD-TO-MATURITY PORTFOLIO
Spanish government
TOTAL HELD-TO-MATURITY
Securities of other foreign Governments mainly include investments made by our subsidiaries in securities issued by the Governments of the countries where they operate.
Loans and Advances to Credit Institutions
As of December 31, 2011, our total loans and advances to credit institutions amounted to €26,012 million, or 4.4% of total assets. Net of our valuation adjustments, loans and advances to credit institutions amounted to €26,107 million as of December 31, 2011, or 4.4% of our total assets.
Loans and Advances to Customers
As of December 31, 2011, our total loans and leases amounted to €359,855 million, or 60.2% of total assets. Net of our valuation adjustments, loans and leases amounted to €351,900 million as of December 31, 2011, or 58.9% of our total assets. As of December 31, 2011 our loans in Spain amounted to €198,948 million. Our foreign loans amounted to €160,907 million as of December 31, 2011. For a discussion of certain mandatory ratios relating to our loan portfolio, see “—Business Overview—Supervision and Regulation—Liquidity Ratio” and “—Business Overview— Supervision and Regulation—Investment Ratio”.
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Loans by Geographic Area
The following table analyzes, by domicile of the customer, our net loans and leases as of December 31, 2011, 2010 and 2009:
Foreign
Western Europe
Latin America
Other
Total foreign
Total loans and leases
Valuation adjustments
Total net lending
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(1)
Total domestic
Loans to individuals
Includes mortgage loans to households for the acquisition of housing.
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The following table sets forth a breakdown, by currency, of our net loan portfolio for 2011, 2010 and 2009.
As of December 31, 2011, loans by BBVA and its subsidiaries to associates and jointly controlled companies amounted to €372 million, compared to €457 million as of December 31, 2010. Loans outstanding to the Spanish government and its agencies amounted to €25,372 million, or 7.1% of our total loans and leases as of December 31, 2011, compared to€23,542 million, or 6.78% of our total loans and leases as of December 31, 2010. 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, 2011, excluding government-related loans, amounted to €20,448 million or approximately 5.7% of our total outstanding loans and leases. As of December 31, 2011 there did not exist any concentration of loans exceeding 10% of our total outstanding loans and leases, other than by category as disclosed in the chart above.
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, 2011. The determination of maturities is based on contract terms.
Total Domestic
Total Foreign
Total Loans and Leases
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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, 2011.
Fixed rate
Variable rate
Loan Loss Reserve
For a discussion of loan loss reserves, see “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies—Allowance for loan losses” and Note 2.2.1) to the Consolidated Financial Statements.
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.
Loan loss reserve at beginning of period
Total loan loss reserve at beginning of period
Loans charged off
Government and other Agencies
Real estate and loans to individuals and other
Total foreign(1)
Total loans charged off
Provision for possible loan losses
Total provision for possible loan losses
Acquisition and disposition of subsidiaries
Effect of foreign currency translation
Loan loss reserve at end of period
Total loan loss reserve at end of period
Loan loss reserve as a percentage of total loans and receivables at end of period
Net loan charge-offs a percentage of total loans and receivables at end of period
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Restated to comply with IFRS-IASB.
Loans charged off in 2011 include€1,794 million related to real estate loans and loans to individuals and others,€267 million related to commercial and financial loans and €1 million related to loans to governmental and non-governmental agencies. Loans charged off in 2011 include €1,847 million related to real estate loans and loans to individuals and others,€776 million related to commercial and financial loans and €5 million related to loans to governmental and non-governmental agencies.
When the recovery of any recognized amount is considered to be remote, this amount is removed from the consolidated balance sheet, without prejudice to any actions taken by the consolidated entities in order to collect the amount until their rights extinguish in full through expiry, forgiveness or for other reasons.
The loans charged off amounted to €4,039 million as of December 31, 2011 compared to€4,402 million as of December 31, 2010. The decrease was primarily due to a decrease in loans charged off in foreign countries.
Our loan loss reserves as a percentage of total loans and leases decreased to 2.5% as of December 31, 2011 from 2.6% as of December 31, 2010, principally due to an increase in loans and leases, mainly in South America, and as a result of the incorporation of Garanti, while provisions remained stable.
Substandard Loans
As described in Note 2.2.1) to the Consolidated Financial Statements, loans are considered to be impaired loans when there are reasonable doubts that the loans will be recovered in full and/or the related interest will be collected for the amounts and on the dates initially agreed upon, taking into account the guarantees received by the consolidated entities to assure (in part or in full) the performance of transactions.
Amounts collected in relation to impaired loans and receivables are used to recognize the related accrued interest and any excess amount is used to reduce the principal not yet repaid. The approximate amount of interest income on our substandard loans which was included in net income attributed to parent company in 2011, 2010, 2009, 2008 and 2007 was €203.4 million,€203.5 million,€192.3 million,€149.7 million and€158.3 million, respectively.
The following table provides information regarding our substandard loans, by domicile and type of customer, as of the dates indicated:
SUBSTANDARD LOANS
Public sector
Other resident sector
Non-resident sector
Total Substandard loans
Total loan loss reserve
Substandard loans net of reserves
Restated to comply with IFRS-IASB. See “Item 3. Key information—Selected Consolidated Financial Data—Restatement”.
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Our total substandard loans amounted to €15,685 million as of December 31, 2011, a 1.4% increase compared to €15,472 million as of December 31, 2010.
As mentioned in Note 2.2.1 to the Consolidated Financial Statements, our loan loss reserve includes loss reserve for impaired assets and loss reserve for not impaired assets but which present an inherent loss. As of December 31, 2011, the loss reserve for impaired assets amounted to €6,378 million, a 5.6% decrease compared to €6,753 million as of December 31, 2010. As of December 31, 2011, the loss reserve for not impaired assets amounted to €3,091 million, a 13.6% increase compared to €2,720 million as of December 31, 2010 due to the incorporation of Garanti and the increase of loans and receivables in South America.
The following table provides information, by domicile and type of customer, regarding our substandard loans and the loan loss reserves to customers taken for each substandard loan category, as of December 31, 2011.
Credit institutions
Other sectors
Commercial and other financial
General reserve
Total substandard loans
Potential Problem Loans
The identification of “Potential problem loans” is based on the analysis of historical delinquency rates trends, categorized by products/clients and geographical locations. This analysis is focused on the identification of portfolios with delinquency rates higher than our average delinquency rates. Once these portfolios are identified, we segregate such portfolios into groups with similar characteristics based on the activities to which they are related, geographical location, type of collateral, solvency of the client and loan to value ratio.
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The delinquency rate in our domestic real estate and construction portfolio was 18.7% as of December 31, 2011, substantially higher than the average delinquency rate for all of our domestic activities (5.5%) and the average delinquency rate for all of our consolidated activities (4.0%) as of such date. Within such portfolio, construction loans and property development loans (which exclude mainly infrastructure and civil construction) had a delinquency rate of 20.9% as of such date. Given such delinquency rate, we performed an analysis in order to define the level of loan provisions attributable to these loan portfolios (see Note 2.2.1 to our Consolidated Financial Statements). The table below sets forth additional information on our “Potential problem loans” and domestic substandard loans as of December 31, 2011:
Domestic(1)
Substandard loans
Potential problem loans
Potential problem loans outside of Spain as of December 31, 2011 were not significant.
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 1% of our total assets as of December 31, 2011, December 31, 2010 and December 31, 2009. 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 subsidiaries in South America, Mexico and United States.
United Kingdom
Other OECD
Total OECD
Central and South America
Total
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 1% of our total assets.
As of December 31, 2011
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As of December 31, 2010
As of December 31, 2009
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, 2011.
Categories(1)
Countries belonging to the OECD whose currencies are listed in the Spanish foreign exchange market
Countries with transitory difficulties(2)
Doubtful countries(2)
Very doubtful countries(2)(3)
Bankrupt countries(4)
Any outstanding which is guaranteed may be treated, for the purposes of the foregoing, as if it were an obligation of the guarantor.
Coverage for the aggregate of these three categories (countries with transitory difficulties, doubtful countries and very doubtful countries) must equal at least 35% of outstanding loans within the three categories. The Bank of Spain has recommended up to 50% aggregate coverage.
Outstandings to very doubtful countries are treated as substandard under Bank of Spain regulations.
Outstandings to bankrupt countries must be charged off immediately. As a result, no such outstandings are reflected on our consolidated balance sheet. Notwithstanding the foregoing minimum required reserves, certain interbank outstandings with an original maturity of three months or less have minimum required reserves of 50%. We met or exceeded the minimum percentage of required coverage with respect to each of the foregoing categories.
Our exposure to borrowers in countries with difficulties (the last four categories in the foregoing table), excluding our exposure to subsidiaries or companies we manage and trade-related debt, amounted to €340 million, €311 million and€321 million as of December 31, 2011, 2010 and 2009, respectively. These figures do not reflect loan loss reserves of 13.2%, 11.6%, and 30.5% respectively,
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against the relevant amounts outstanding at such dates. Deposits with or loans to borrowers in all such countries as of December 31, 2011 did not in the aggregate exceed 0.1% of our total assets.
The country-risk exposures described in the preceding paragraph as of December 31, 2011, 2010 and 2009 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, non-transfer, non-convertibility and, if appropriate, war and political violence. The sums insured as of December 31, 2011, 2010 and 2009 amounted to $58 million, $44 million and $14 million, respectively (approximately €45 million, €33 million and€10 million, respectively, based on a euro/dollar exchange rate on December 31, 2011 of $1.00 = €0.77, on December 31, 2010 of $1.00 = €0.75, and on December 31, 2009 of $1.00 = €0.69).
Deposits
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, disregarding any valuation adjustments and accrued interest.
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For an analysis of our deposits, including non-interest bearing demand deposits, interest-bearing demand deposits, saving deposits and time deposits, see Note 23 to the Consolidated Financial Statements.
As of December 31, 2011, the maturity of our time deposits (excluding interbank deposits) in denominations of $100,000 (approximately€77,083 considering the noon buying rate as of December 30, 2011) or greater was as follows:
3 months or under
Over 3 to 6 months
Over 6 to 12 months
Over 12 months
Time deposits from Spanish and foreign financial institutions amounted to €32,859 million as of December 31, 2011, substantially all of which were in excess of $100,000 (approximately €77,083 considering the noon buying rate as of December 31, 2011).
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 customer deposits as of December 31, 2011, 2010 and 2009, see Note 23 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 as of December 31, 2011, 2010 and 2009.
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Securities sold under agreements to repurchase (principally Spanish Treasury bills)
As of December 31
Average during year
Maximum quarter-end balance
Bank promissory notes
Bonds and Subordinated debt
Total short-term borrowings as of December 31
Return on Equity
The following table sets out our return on equity ratios:
As of or for theYear Ended December 31,
Return on equity(1)
Return on assets(2)
Dividend pay-out ratio(3)
Equity to assets ratio(4)
Represents net income attributed to parent company for the year as a percentage of average stockholder’s funds for the year.
Represents net income attributed to parent company as a percentage of average total assets for the year.
Represents dividends declared by BBVA (including the cash remuneration paid under the “Dividendo Opción” scheme) as a percentage of net income attributed to parent company. This ratio does not take into account the non-cash remuneration paid by BBVA under the “Dividendo Opción” scheme (in the form of BBVA shares or ADSs). See “—Business Overview—Supervision and Regulation—Dividends” and “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends”.
Represents average total equity over average total assets.
F. Competition
The commercial banking sector in Spain has undergone significant consolidation. In the majority of the markets where we provide financial services, the Banco Santander Group is our largest competitor, but the restructuring process that it is taking place is expected to increase the size of certain banks, such as Bankia (an integration of seven regional saving banks, led by Caja Madrid and Bancaja) and La Caixa.
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We face strong competition in all of our principal areas of operations. The deregulation of interest rates on deposits in the past decade led to increased competition for large demand deposits in Spain and the widespread promotion of interest-bearing demand deposit accounts and mutual funds. The Bank of Spain, through its Circular 3/2011, of June 30, required that a higher contribution be made to the FGD in connection with deposits the remuneration of which exceeded certain thresholds dependent on the evolution of the Euribor. However, this new requirement only had a temporary effect on the moderation of interest rates.
Former Spanish savings banks, many of which have become banks and received financial or other support from the Spanish government, and money market mutual funds provide strong competition for savings deposits, particularly in the context of increasing interest rates of term 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. In Spain, competition distortions in the term deposits market have intensified, and this situation is expected to continue due to the liquidity needs of some financial institutions, which are offering high interest rates.
The entry of on-line banks into the Spanish banking system has increased competition, mainly in customer funds businesses such as deposits. Insurance companies and other financial services firms also compete for customer funds. In addition, the high interest rates offered by Spanish public debt has made it a strong competitor to deposits. Like the commercial banks, savings banks, insurance companies and other financial services firms are expanding the services offered to consumers in Spain. We face competition in mortgage loans 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. Besides, several initiatives have been implemented recently in order to facilitate the creation of a Pan-European financial market. For example, SEPA (Single Euro Payments Area) is a major project which aims at replacing all existing payment systems—organized by the Member States with new, Pan-Euro systems and it is currently being implemented and the MiFID project (Markets in Financial Instruments Directive) aims to create a European framework for investment services.
Following the recent financial turmoil, a number of banks have disappeared or have been absorbed by other banks. The trend indicates that this will continue in the future, with a number of mergers and acquisitions between financial entities. In Spain, Royal Decree-Law 2/2012, of February 3, represents an additional step in the reform of the Spanish financial system which, with the purpose of achieving a stronger banking sector, is expected to intensify this process. In the U.S., the government has already facilitated the purchase of troubled banks by other competitors, and European governments, including the Spanish government, have expressed their willingness to facilitate these types of operations.
In the United States, where we operate through BBVA Compass, the competitive landscape has also been significantly affected by the financial crisis. The U.S. banking industry has experienced significant impairment on its assets in 2009, 2010 and 2011, which will result in continuing losses in select product categories and slow loan growth. Data published by the Federal Deposit Insurance Corporation’s (FDIC) in the Quarterly Banking Profile for the third quarter of 2011 suggests that the total delinquency rate for commercial banks declined slightly, but that net interest income declined for the third straight quarter. While commercial real estate delinquency declined from 7.1% in the third quarter of 2010 to 6.8% in the third quarter of 2011, residential delinquency declined only from 10.2%
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to 10.1% over such period, a level that is still stressed. Domestic loan levels at commercial banks generally declined as banks continued to progress in deleveraging. According to the FDIC Quarterly Banking Profile for the third quarter of 2011, the delinquency rates for both commercial real estate (CRE) and residential loans remains elevated. Our forecasts for the charge-off on CRE and residential loans suggest both will continue to improve through 2012 and 2013. We believe that improvement in banks’ asset quality is dependent on the evolution of the real estate market, while consumer and commercial and industrial charge-offs and delinquencies are closer to normal ranges.
In Mexico, where we operate through BBVA Bancomer, the banking industry remained solvent throughout the financial crisis. Total bank credit registered an annual growth rate in 2011 of 12.7% (9.1% in real terms), with an estimated annual growth rate for 2012 of 13.5 % (9.6% in real terms). We believe that these projections will materialize only if economic growth is positive and sustained.
In Mexico, changes in banking regulation could have a significant potential impact on competition. Rules to limit loans to firms within a certain financial group (préstamos relacionados) were adopted in March 2011. Such limits will impact some small banks of the system with strong connections with retail stores (for example, Inbursa and Banco Azteca). In addition, authorities have strengthened the measures to improve transparency and information about financial services by enacting new legislation that gives more powers to the central bank (Banco de México) to regulate interest rates and bank fees. It also gives more powers to the financial services consumer protection agency (Comisión Nacional para la Defensa de los Usuarios de los Servicios Financieros, Condusef) to set information requirements for bank account statements, product publicity, and contracts, and to improve financial education. The consolidation and restructuring of some non-banking financial intermediaries (Sofoles) will imply that some of them will go out of business or be acquired. Along these lines, the mortgage subsidiary of BBVA-Bancomer (Hipotecaria Nacional) acquired the portfolio of certain Sofoles in 2010.
None.
Overview
The outlook for the global economy worsened over the last few months of 2011, driven mainly by lower than expected economic growth mainly in developed economies; the aggravation of the sovereign debt crisis in Europe, that has turned more systemic; the intensification of the connection between sovereign concerns and concerns over the health of the European financial system; and the increase of financial market volatility, triggered by higher global risk aversion, and spilling over to most risky assets and emerging economies for the first time since 2009.
In 2011, uncertainty and risks in the global economy increased due to renewed financial turmoil, particularly in Europe as a result of the doubts regarding the fiscal consolidation process in some countries. Europe is starting to experience the effects of persistently high financial tensions since September 2011, given the lack of substantial progress in the resolution of the sovereign and financial crisis (see Note 7.1.5 to the Consolidated Financial Statements for information concerning our sovereign exposure). On the other hand, the slowdown in emerging economies, apart from headwinds coming from developed economies, is partly the result of deliberate monetary policy tightening until the first half of 2011, designed to avoid overheating in their respective economies.
After a relatively good performance in the subprime and liquidity crises in 2009, the Spanish economy suffered the consequences of the peripheral sovereign crisis in 2010. The Greek, Irish and Portuguese rescue programs have spread doubts about the Spanish economy. Financial stress in
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Europe has increased the cost of financing of governments and financial institutions which, in some cases, have lost the access to international funding. As a result of this continued contraction, economic conditions and employment in Spain could deteriorate further in 2012. Our Economic Research Department estimates that the Spanish economy will shrink in terms of gross domestic product in 2012, with an estimated negative growth rate of 1.3%. Growth forecasts for the Spanish economy could be further revised downwards if measures adopted in response to the economic crisis are not as effective as expected.
In Europe, despite the concerns referred to above, recent data seems to point to a more balanced growth with a larger contribution of domestic demand, while net exports remains the key driver of economic growth. However, the loss of momentum in global growth now adds more uncertainty to the sustainability of the recovery, not only in the periphery but also in some core countries such as Germany. The sovereign debt crisis in Europe intensified since August 2011, and spilled into funding pressures in the financial sector. Financial tensions in Europe continue at levels higher than after the fall of Lehman Brothers in 2008. This, together with the effect of fiscal adjustment in peripheral countries, imply a downward revision of growth projections for Europe, which are -0.5% for 2012, with a slow rebound in 2013. Nonetheless, it is important to note that these projections depend on a fast resolution of the crisis and a notable reduction of financial stress, to avoid a sharper effect on growth. The difference between the performance of core countries and the periphery in Europe will continue to be large, partly because of the large fiscal adjustment in the latter.
We expect that the U.S. will show resilience in 2012, with an estimated annual growth rate of 2.3% in 2012 and 2.2% in 2013. However, this recovery is expected to be weaker than in historic post-recession cycles, and may be affected by the risks emanating from Europe and the domestic risk of high policy uncertainty, including a possible massive fiscal tightening in 2013 (as tax cuts expire and automatic spending cuts related to the debt ceiling limit agreement are implemented automatically). In addition, weak housing conditions, tight credit markets and ongoing deleverage will limit the pace of consumption growth. All in all, there are more risks to the downside than to the upside in the U.S.
Perspectives on the Mexican economy’s performance deteriorated throughout 2011, particularly toward the end of the year. The analysts’ consensus points to 2012 seeing Mexican GDP growth of around 3.1% (3.3% according to BBVA Research). Mexico is far from the source of the uncertainties affecting Europe, but negative spillover effects cannot be ruled out if sustained increases in the global risk premium continue and if the impact of European financial tensions in the U.S. results in a reduced demand of Mexican goods compared to 2011.
We believe emerging economies are heading for a soft landing, buttressed by strong domestic demand. The high confidence level has allowed domestic demand in emerging economies to hold up well, even as some of the effects of increased global risk aversion are felt in the financial markets in the region, through lower capital inflows, some impact on trade finance, reduced asset prices and lower exchange rates. In Latin America, inflation has increased in recent months in most countries. In China, overheating concerns have diminished while latest activity indicators show an increasing deceleration, which is still consistent with a soft-landing scenario. GDP growth for the fourth quarter of 2011 beat expectations (8.9% year-on-year compared to 9.1% year-on-year in the third quarter of 2011), underpinned by exports which, while slowing, are still high. This has helped ease fears of a hard landing by the Chinese economy, which would drag down the rest of Asia. In Turkey, the current account deficit has widened rising concerns about its vulnerability to a sudden stop of capital flows. Concerns are focused on the growth of trade partners, given Turkey’s external reliance on European demand.
In addition, one of Turkey’s challenges lies in the labor market situation, with a high unemployment rate (which is currently above 10%), affecting especially young people (with an unemployment rate of 25%).
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Critical Accounting Policies
The Consolidated Financial Statements as of and for the years ended December 31, 2011, 2010 and 2009 were prepared by the Bank’s directors in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004, and in compliance with IFRS-IASB, and by applying the basis of consolidation, accounting policies and measurement bases described in Note 2 to the Consolidated Financial Statements, so that they present fairly the Group’s equity and financial position as of and for the years ended December 31, 2011, 2010 and 2009, and the results of its operations and the consolidated cash flows in 2011, 2010 and 2009. The Consolidated Financial Statements were prepared on the basis of the accounting records kept by the Bank and by each of the other Group companies and include the adjustments and reclassifications required to unify the accounting policies and measurement bases used by the Group. (See Note 2.2 to the Consolidated Financial Statements).
In preparing the Consolidated Financial Statements estimates were made by the Group and the consolidated companies in order to quantify certain of the assets, liabilities, income, expenses and commitments reported herein. These estimates relate mainly to the following:
The impairment on certain assets.
The assumptions used to quantify other provisions and for the actuarial calculation of the post-employment benefit liabilities and commitments.
The useful life and impairment losses of tangible and intangible assets.
The measurement of goodwill arising on consolidation.
The fair value of certain unlisted financial assets and liabilities.
Although these estimates were made on the basis of the best information available as of December 31, 2011, 2010 and 2009, respectively, on the events analyzed, events that take place in the future might make it necessary to revise these estimates (upwards or downwards) in coming years.
Note 2 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.
Fair value of financial instruments
The fair value of an asset or a liability on a given date is taken to be the amount for which it could be exchanged or settled, respectively, between two knowledgeable, willing parties in an arm’s length transaction. The most objective and common reference for the fair value of an asset or a liability is the price that would be paid for it on an organized, transparent and deep market (“quoted price” or “market price”).
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If there is no market price for a given asset or liability, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, by using mathematical measurement models sufficiently tried and trusted by the international financial community. Such estimates would take into consideration the specific features of the asset or liability to be measured and, in particular, the various types of risk associated with the asset or liability. However, the limitations inherent to the measurement models developed and the possible inaccuracies of the assumptions required by these models may signify that the fair value of an asset or liability thus estimated does not coincide exactly with the price for which the asset or liability could be purchased or sold on the date of its measurement.
See Note 2.2.1 to the Consolidated Financial Statements, which contains a summary of our significant accounting policies.
Derivatives and other future transactions
These instruments include outstanding foreign currency purchase and sale transactions, outstanding 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.
All derivatives are recognized on the balance sheet at fair value from the date of arrangement. If the fair value of a derivative is positive, it is recorded as an asset and if it is negative, it is recorded as a liability. Unless there is evidence to the contrary, it is understood that on the date of arrangement the fair value of the derivatives is equal to the transaction price. Changes in the fair value of derivatives after the date of arrangement are recognized with a balancing entry under the heading “Gains or Losses on Financial Assets and Liabilities” in the consolidated income statement.
Specifically, the fair value of the standard financial derivatives included in the held for trading portfolios is equal to their daily quoted price. If, under exceptional circumstances, their quoted price cannot be established on a given date, these derivatives are measured using methods similar to those used to measure over-the-counter (“OTC”) derivatives.
The fair value of OTC derivatives is equal to the sum of the future cash flows arising from the instruments discounted at the measurement date (“present value” or “theoretical value”). These derivatives are measured using methods recognized by the financial markets, including the net present value (“NPV”) method and option price calculation models.
Financial derivatives that have as their underlying equity instruments, whose fair value cannot be determined in a sufficiently objective manner and are settled by delivery of those instruments, are measured at cost.
Financial derivatives designated as hedging items are included in the heading of the balance sheet “Hedging derivatives”. These financial derivatives are valued at fair value.
See Note 2.2.1 to the Consolidated Financial Statements, which contains a summary of our significant accounting policies with respect to these instruments.
Goodwill in consolidation
Pursuant to the new IFRS 3, the positive difference on the date of a business combination between the sum of the fair value of the price paid, the amount of all the non-controlling interests and the fair value of stock previously held in the acquired entity, on one hand, and the fair value of the
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assets acquired and liabilities assumed, on the other hand, is recorded as goodwill on the asset side of the balance sheet. Goodwill represents the future economic benefits from assets that cannot be individually identified and separately recognized. Goodwill is not amortized and is subject periodically to an impairment analysis. Any impaired goodwill is written off.
Goodwill is allocated to one or more cash-generating units, or CGUs, expected to benefit from the synergies arising from business combinations. The CGUs units represent the Group’s smallest identifiable business and/or geographical segments as managed internally by its directors within the Group.
The CGUs to which goodwill has been allocated are tested for impairment based on the carrying amount of the unit including the allocated goodwill. Such testing is performed at least annually and whenever there is an indication of impairment.
For the purpose of determining the impairment of a CGU to which a part or all of goodwill has been allocated, the carrying amount of that unit, adjusted by the theoretical amount of the goodwill attributable to the non-controlling interest, shall be compared to its recoverable amount. The resulting loss shall be apportioned by reducing, firstly, the carrying amount of the goodwill allocated to that unit and, secondly, if there are still impairment losses remaining to be recognized, the carrying amount of the rest of the assets. This shall be done by allocating the remaining loss in proportion to the carrying amount of each of the assets in the unit. In any case, impairment losses on goodwill can never be reversed.
See Notes 2.2.7 and 2.2.8 to the Consolidated Financial Statements, which contains a summary of our significant accounting policies related to goodwill.
As mentioned in Note 20.1 to the Consolidated Financial Statements, the Group has performed the goodwill impairment test as of December 31, 2011, 2010 and 2009.
The results from each of these tests on the dates mentioned were as follows:
As of December 31, 2011, impairment losses of €1,444 million have been estimated in the United States CGU which have been recognized under “Impairment losses on other assets (net)—Goodwill and other intangible assets” in the consolidated income statement for 2011. This loss is the result of a downward revision of the cash flows projections estimated for this CGU, as a result of the following factors:
the economic recovery is slower than expected and demand for loans is lower than forecasted; this, together with a low interest rate forecast imply a bigger than expected slowdown in net interest income growth; and
growing regulatory pressure, with the implementation of new regulations, will imply lower than expected fee income, mainly related to the use of credit cards, while operating costs will rise with respect to our initial expectations.
Both the U.S. CGU’s fair values and the fair values assigned to its assets and liabilities are based on the estimates and assumptions that the Group’s management has deemed most likely given the circumstances. However, some changes to the valuation assumptions used could result in differences in the impairment test result. If the discount rate had increased or decreased by 50 basis points, the difference between the carrying amount and its recoverable amount would have increased or decreased by up to €585 million and€671 million, respectively, as of December 31, 2011. If the growth rate had increased or decreased by 50 basis points, the difference between the carrying amount and its recoverable amount would have increased or decreased by €517 million and €452 million, respectively, as of such date.
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As of December 31, 2010, there were no impairment losses on the goodwill recognized in the Group’s CGUs, except for an insignificant impairment on the goodwill of the Spain CGU, related to the impairment on the investments in Rentrucks, Alquiler y Servicios de Transportes, S.A. and in BBVA Finanzia SpA (of €9 million and€4 million, respectively).
The most significant goodwill corresponds to the United States CGU. The recoverable amount of this CGU is equal to its value in use. This is calculated as the discounted value of the cash flow projections estimated by our management based on the latest budgets available for the next five years. As of December 31, 2010, the Group used an estimated sustainable growth rate of 4.2% (4.3% as of December 31, 2009) to extrapolate the cash flows in perpetuity based on the U.S. real GDP growth rate. The discount rate used to discount the cash flows was the cost of capital of the CGU, which stood at 11.4% as of December 31, 2010 (11.2% as of December 31, 2009), consisting of the free risk rate plus a risk premium.
As of December 31, 2009, impairment losses of €1,097 million were estimated in the United States CGU which were recognized under “Impairment losses on other assets (net)—Goodwill and other intangible assets” in the consolidated income statement for 2009 (see Note 50 to the Consolidated Financial Statements). The impairment loss of this unit was attributed to the significant decline in economic and credit conditions in the states in which the Group operates in the United States. The valuations were verified by an independent expert, not related to the Group’s external auditor.
Both the U.S. CGU’s fair values and the fair values assigned to its assets and liabilities were based on the estimates and assumptions that the Group’s management deemed most likely given the circumstances. However, some changes to the valuation assumptions used could result in differences in the impairment test result. As of December 31, 2009, if the discount rate had increased or decreased by 50 basis points, the difference between the carrying amount and its recoverable amount would have increased or decreased by up to €573 million and €664 million, respectively. If the growth rate had increased or decreased by 50 basis points, the difference between the carrying amount and its recoverable amount would have increased or decreased by€555 million and€480 million, respectively.
Post-employment benefits and other long term commitments to employees
Pension and post-retirement benefit costs and credits are based on actuarial calculations. Inherent in these calculations are assumptions including discount rates, rate of salary increase and expected return on plan assets. Changes in pension and post-retirement costs may occur in the future as a consequence of changes in interest rates, expected return on assets or other assumptions. See Note 2.2.12 to the Consolidated Financial Statements, which contains a summary of our significant accounting policies about pension and post-retirement benefit costs and credits.
Allowance for loan losses
As we describe in Note 2.2.1 to the Consolidated Financial Statements, a loan is considered to be an impaired loan and, therefore, its carrying amount is adjusted to reflect the effect of its impairment when there is objective evidence that events have occurred which give rise to a negative impact on the future cash flows that were estimated at the time the transaction was arranged. The potential impairment of these assets is determined individually or collectively.
Losses determined collectively are calculated using statistical procedures and are deemed equivalent to the portion of losses incurred on the date that the consolidated financial statements are prepared that has yet to be allocated to specific transactions.
The Group uses historic statistical data in its internal ratings models (“IRBs”), which were approved by the Bank of Spain for some portfolios in 2009, albeit only for the purpose of estimating
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regulatory capital under Basel II. It uses these internal models to calculate the economic capital required in its activities and uses the expected loss concept to quantify the cost of credit risk for incorporation in its calculation of the risk-adjusted return on capital of its operations.
These models allow us to estimate the expected loss of the credit risk of each portfolio during the one-year period after the relevant reporting date, taking into consideration the characteristics of the counterparty and the guarantees and collateral associated with the transactions.
The expected loss is calculated taking into account three factors: exposure at default, probability of default and loss given default.
Exposure at default (“EAD”) is the amount of risk exposure at the date of default by the counterparty.
Probability of default (“PD”) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction. PD is measured using a time horizon of one year (i.e. it quantifies the probability of the counterparty defaulting in the coming year). The definition of default used includes amounts past due by 90 days or more and in cases where there is no default but there are doubts as to the solvency of the counterparty. We assign a PD of 100% where there is a default.
Loss given default (“LGD”) is the loss arising in the event of default. It depends mainly on the characteristics of the counterparty and the valuation of the guarantees and collateral associated with the related transaction.
Once the PD is calculated, our models estimate the allowance for loan losses taking into account the LGD, according to the criteria set forth above. In order to calculate the LGD at each balance sheet date, we evaluate the estimated cash flows from the sale of the collateral by estimating its sale price (in the case of real estate collateral, we take into account declines in property values which could affect the value of such collateral, mainly in Spain) and its estimated cost of sale. In the event of a default, we become contractually entitled to the property at the end of the foreclosure process or when purchased from borrowers in distress, and recognize the collateral at its fair value. After the initial recognition of these non-current assets classified as held for sale or inventories, respectively, they are measured at the lower of their carrying amount and their fair value less their estimated cost of sale.
The calculation of the expected loss also takes into account the “business cycle adjustment” of these factors, particularly PD and LGD. This is a means of establishing a measure of risk that goes beyond the time of its calculation so as to capture representative information of the behavior of a given portfolio over a complete economic cycle. We implemented a methodology which complies with IFRS-IASB and is consistent with the Bank of Spain’s requirements for the determination of the level of provisions required to cover incurred losses.
The methodology for calculating the allowance for losses determined collectively seeks to identify the amounts of losses which, although incurred at the reporting date, have not yet been allocated to specific transactions and which the Group knows, on the basis of historical experience and other specific information, will arise following the reporting date.
The calculation of the incurred but not reported loss adjusts the expected loss taking into account two parameters:
The point-in-time parameter, which is an adjustment to eliminate the through-the-cycle component of the expected loss.
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The loss identification period (“LIP”), which is the time period between the occurrence of a specific impairment event and objective evidence of impairment becoming apparent on an individual basis—that is, the time between the loss event and the date on which we identify its occurrence.
However, the Bank of Spain requires that the calculation of the allowance for collective losses incurred must also be calculated based on the information provided by the Bank of Spain until the Spanish regulatory authority has verified and approved these internal models.
For the years ended December 31, 2011, 2010 and 2009, there is no material difference in the amount of allowances for loan losses calculated in accordance with EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and IFRS-IASB.
The estimates of the portfolio’s inherent risks and overall recovery vary with changes in the economy, individual industries, countries and individual borrowers’ or counterparties’ ability and willingness to repay their obligations. The degree to which any particular assumption affects the allowance for credit losses depends on the severity of the change and its relationship to the other assumptions.
Key judgments used in determining the allowance for loan losses include: (i) risk ratings for pools of commercial loans and leases; (ii) market and collateral values and discount rates for individually evaluated loans; (iii) product type classifications for consumer and commercial loans and leases; (iv) loss rates used for consumer and commercial loans and leases; (v) adjustments made to assess current events and conditions; (vi) considerations regarding domestic, global and individual countries economic uncertainty; and (vii) overall credit conditions.
Cybersecurity and fraud management
The BBVA Group has established computer security controls to prevent and mitigate potential computer attacks that may materially affect the Group’s results. These controls are part of the risk assessment and mitigation system established in our corporate operational risk and internal control structure in order to ensure compliance with the Sarbanes-Oxley Act, with a view to guaranteeing the proper identification and effective control of such risks. In the implementation, audit and review of such controls we have identified no material risk to our operations, owing to the effective mitigation of such risk as such security controls have provided.
We have divided identified risks into two categories distinguishing between risks that may affect the availability of our computer systems and their supporting processes and risks that may affect the confidentiality and integrity of the information processed by such systems.
Risks related to lack of availability are managed and mitigated through our Business Continuity Plans and our Systems Continuity Plans.
We have 126 Business Continuity Plans in operation across 25 countries. A number of such plans have been activated during the past year as a result of recent tornados and floods in the south of the United States, Mexico, Colombia and Venezuela, an earthquake in Lorca (Spain) and volcanic emissions in Patagonia (Argentina).
The European Union Critical Infrastructure Protection Directive was incorporated into Spanish law in 2011. We believe that BBVA is fully prepared to fulfill any possible obligations and requirements set forth therein.
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The risks identified that may affect the confidentiality and integrity of our information are managed and mitigated within the programs established throughout the BBVA Group in our respective Information security master plans. These plans are designed to mitigate prospective risks through a security model that includes Identity Management, Security Architectures, Monitoring Systems and Incident Management.
We believe that the services outsourced by the BBVA Group are not exposed to material cyber security risks.
The BBVA Group has not undergone any security incidents which individually or in the aggregate can be considered material.
For the type of business and operations carried out by the BBVA Group, we have identified no cyber security incident related risks that could remain undetected for an extended period of time and represent a material risk. Moreover, and with regard to any possible banking-related cyber security risks which might affect the Group, there is no public evidence of incidents occurring within the financial sector which might represent a material risk to the Group.
In 2011, fraud management in the various businesses segments and geographical areas has been focused primarily on fraud prevention and early detection of alerts through the use of technology. The Group has undertaken development of new projects for risk management efficiency improvements that will be executed in 2012.
A. Operating Results
Factors Affecting the Comparability of our Results of Operations and Financial Condition
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, U.S. dollars, Argentine pesos, Chilean pesos, Colombian pesos, Venezuelan bolivars fuerte and New Peruvian Soles. For example, if Latin American currencies and the U.S. dollar depreciate against the euro, when the results of operations of our subsidiaries in the countries using these currencies 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 period. 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 subsidiaries. By contrast, the appreciation of Latin American currencies and the U.S. dollar against the euro would have a positive impact on the results of operations of our subsidiaries in the countries using these currencies when their results of operations are included in our consolidated financial statements. We are also exposed to fluctuations of the Turkish lira and the Chinese yuan, as a result of our investments in Garanti and CIFH and CNCB, respectively.
The assets and liabilities of our subsidiaries which maintain their accounts in currencies other than the euro have been converted to the euro at the period-end exchange rates for inclusion in our Consolidated Financial Statements. Income statement items have been converted at the average exchange rates for the period. The following table sets forth the exchange rates of several Latin American currencies, the U.S. dollar, the Turkish lira and the Chinese yuan against the euro, expressed in local currency per €1.00 for 2011, 2010 and 2009 and as of December 31, 2011, 2010 and 2009 according to the European Central Bank (“ECB”).
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Mexican peso
U.S. dollar
Argentine peso
Chilean peso
Colombian peso
Peruvian new sol
Venezuelan bolivar
Turkish lira
Chinese yuan
During 2011, the Mexican peso depreciated, as to a lesser extent did the Argentinean peso. The Chilean peso appreciated against the euro on average terms but depreciated year-on-year as of December 31, 2011. In contrast, there was a year-on-year appreciation in the U.S. dollar as of December 31, 2011 (though there was a depreciation of the U.S. dollar on average terms), as there was with the rest of the key Latin American currencies, the Turkish lira and the Chinese yuan. Overall, the effect of the exchange rates on the year-on-year comparison of the Group’s income statements and balance sheet is negative.
BBVA Group Results of Operations for 2011 Compared to 2010
The changes in the Group’s consolidated income statements for 2011 and 2010 were as follows:
Interest expense and similar charges
Net gains (losses) on financial assets and liabilities
Personnel expenses
General and administrative expenses
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Gains (losses) on derecognized assets not classified as non-current assets held for sale
Not meaningful.
The changes in our consolidated income statements for 2011 and 2010 were as follows:
The following table summarizes the principal components of net interest income for 2011 compared to 2010.
Net interest income decreased 1.2% to€13,160 million for the year ended December 31, 2011 from €13,320 million for year ended December 31, 2010, due mainly to the upturn in interest rates in the Eurozone in 2011, which affected liability costs to a greater extent, and with a faster impact, than the return on assets. The decrease in net interest income is also the result of the extremely complex environment in which it has been produced, with restricted lending activity in Spain and more expensive wholesale funding due to the increased spread paid for Spain’s risk. The decrease in net interest income was modestly offset by the increased volume of business and sound price management in South America as well as the acquisition of Garanti in March 2011.
Dividend income increased 6.2% to €562 million for the year ended December 31, 2011 from €529 million for the year ended December 31, 2010, due primarily to dividends from Telefónica, S.A.
Share of profit or loss of entities accounted for using the equity method increased to €600 million for the year ended December 31, 2011 from €335 million for the year ended December 31, 2010 due to the increased profit of China National Citic Bank (“CNCB”).
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The breakdown of fee and commission income for 2011 and 2010 is as follows:
Commitment fees
Contingent liabilities
Letters of credit
Bank and other guarantees
Arising from exchange of foreign currencies and banknotes
Collection and payment services income
Bills receivable
Current accounts
Credit and debit cards
Checks
Transfers and others payment orders
Rest
Securities services income
Securities underwriting
Securities dealing
Custody securities
Investment and pension funds
Rest assets management
Counseling on and management of one-off transactions
Financial and similar counseling services
Factoring transactions
Non-banking financial products sales
Other fees and commissions
Fee and commission income increased 4.4% to€5,618 million for the year ended December 31, 2011 from €5,382 million for the year ended December 31, 2010 due principally to increased fees linked to credit and debit cards (€100 million originated by Garanti), which more than offset a decline in fees related to current accounts and checks.
The breakdown of fee and commission expenses for 2011 and 2010 is as follows:
Brokerage fees on lending and deposit transactions
Fees and commissions assigned to third parties
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Fee and commission expenses increased 25.2% to €1,058 million for the year ended December 31, 2011 from €845 million for the year ended December 31, 2010, primarily due to the increase in fees and commissions assigned to third party banking services, specifically credit and debit cards, and other fees and commissions.
Net gains (losses) on financial assets and liabilities and exchange differences
Net gains (losses) on financial assets and liabilities decreased by 22.7% to€1,114 million for the year ended December 31, 2011 from €1,441 million for the year ended December 31, 2010, primarily due to declines in the value of assets as a result of market prices evolution, reduced customer activity and the absence of earnings from portfolio sales.
Net exchange differences decreased 19.4% to€365 million for the year ended December 31, 2011 from €453 million for the year ended December 31, 2010. In the first half of 2011, the euro appreciated against the U.S. dollar due to the increasing spread between interest rates; however, in the second half of the year, the European debt crisis weakened the euro’s position. The combination of a stronger euro and the relative strength of emerging currencies against the U.S. dollar resulted in a generally unfavorable performance.
Other operating income and expenses
Other operating income amounted to €4,247 million for the year ended December 31, 2011, a 19.9% increase compared to €3,543 million for the year ended December 31, 2010, due primarily to increased income derived from insurance and reinsurance contracts.
Other operating expenses for the year ended December 31, 2011, amounted to €4,042 million, a 24.4% increase compared to the €3,248 million recorded for the year ended December 31, 2010 due primarily to higher contributions to deposit guarantee funds in the countries in which we operate and to increased provisions related to insurance and reinsurance contracts.
As a result of the foregoing, gross income for the year ended December 31, 2011 was €20,566 million, a 1.6% decrease from the €20,910 million recorded for the year ended December 31, 2010.
Administration costs for the year ended December 31, 2011 were €9,104 million, a 10.9% increase from the €8,207 million recorded for the year ended December 31, 2010, due primarily to the Group’s growth (mainly through the acquisition of our stake in Garanti) and expansion plans. Progress continues to be made in developing customer products and segments in franchises operating in emerging countries and in extending banking penetration to take advantage of economic growth. In contrast, in developed markets, BBVA focuses on improving customer relations and distribution efficiency. Additionally, investment in technology, personnel and brand awareness continues in the Bank as a whole.
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The table below provides a breakdown of personnel expenses for 2011 and 2010.
Wages and salaries
Social security costs
Transfers to internal pension provisions
Contributions to external pension funds
Other personnel expenses
The table below provides a breakdown of general and administrative expenses for 2011 and 2010.
Technology and systems
Communications
Advertising
Property, fixtures and materials
Of which: Rents expenses
Taxes other than income tax
Other expenses
Other administrative expenses
Depreciation and amortization for the year ended December 31, 2011 amounted to€847 million an 11.3% increase compared to €761 million recorded for the year ended December 31, 2010, due primarily to the amortization of software and tangible assets for own use.
Provisions (net) for the year ended December 31, 2011 amounted to €510 million, a 5.8% increase compared to €482 million recorded for the year ended December 31, 2010, primarily to cover early retirement benefits, other allocations to pension funds and transfers to provisions for contingent liabilities.
Impairment on financial assets (net)
Impairment on financial assets (net) for the year ended December 31, 2011 amounted to €4,226 million, a 10.4% decrease compared to the €4,718 million recorded for the year ended December 31, 2010.
Impairment on financial assets (net) was negatively affected in 2009 and 2010 in Spain and in the United States by the significant increase in substandard loans, mainly as a result of the deterioration of the economic environment. Impairment on financial assets (net) for the year ended December 31, 2011, continued to be impacted in Spain, Portugal and, to a lesser extent, in the United States by the challenging economic environment. The Group’s non-performing assets ratio was 4.0% as of December 31, 2011, compared to 4.1% as of December 31, 2010.
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Net operating income for the year ended December 31, 2011 amounted to€5,879 million, a 12.8% decrease from the €6,742 million recorded for the year ended December 31, 2010.
Impairment on other assets (net)
Impairment on other assets (net) for the year ended December 31, 2011 amounted to €1,885 million, compared to the€489 million recorded for the year ended December 31, 2010. Impairment on other assets (net) for 2011 includes impairment losses relating to goodwill of €1,444 million in the United States and provisions made for real estate and foreclosed assets.
Gains (losses) on derecognized assets not classified as non-current assets held for sale for the year ended December 31, 2011 amounted to a gain of €46 million, a 12.2% increase over the €41 million gain recorded for the year ended December 31, 2010.
Gains (losses) in non-current assets held for sale not classified as discontinued operations for the year ended December 31, 2011, amounted to a loss of€270 million, compared to a gain of €127 million for the year ended December 31, 2010, mainly as a result of an increase in write-downs on real estate investments and a decrease in the profits on sales and lease back operations which amounted to €67 million in 2011 compared to €273 million in 2010.
As a result of the foregoing, income before tax operations for the year ended December 31, 2011 was €3,770 million, a 41.3% decrease from the €6,422 million recorded for the year ended December 31, 2010.
Income tax for the year ended December 31, 2011 amounted to €285 million, an 80% decrease from the €1,427 million recorded for the year ended December 31, 2010, due to lower income before tax, a decrease in tax expenses due to the amortization of certain goodwill arising from investments in foreign companies made prior to December 31, 2007, whose deductibility is contemplated in the European Union decision published on May 21, 2011, revenues with low or zero tax rates (basically dividends and equity accounted earnings), and the higher proportion of results coming from Latin America and Garanti, which carry a low effective tax rate.
As a result of the foregoing, net income for the year ended December 31, 2011 was €3,485 million, a 30.2% decrease from the €4,995 million recorded for the year ended December 31, 2010.
Net income attributed to parent company for the year ended December 31, 2011 was €3,004 million, a 34.8% decrease from the €4,606 million recorded for the year ended December 31, 2010.
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Net income attributed to non-controlling interests for the year ended December 31, 2011 was €481 million, a 23.7% increase over the €389 million recorded for the year ended December 31, 2010, principally due to the performance of Venezuela.
BBVA Group Results of Operations for 2010 Compared to 2009
The changes in the Group’s consolidated income statements for 2010 and 2009 were as follows:
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The changes in our consolidated income statements for 2010 and 2009 were as follows:
The following table summarizes the principal components of net interest income for 2010 compared to 2009.
Net interest income decreased 4.0% to€13,320 million for the year ended December 31, 2010 from €13,882 million for the year ended December 31, 2009, due to the decrease in yield on assets and the increase in the cost of liabilities. The decrease in yield on assets was due primarily to the fact that the decrease in market interest rates during 2009 was gradually reflected in the yield of variable rate mortgage loans during 2009, whereas in 2010 this decrease was largely completed at the beginning of the year, and affected most of 2010. Additionally, the Group made continued efforts to gradually increase the relative weight of lower risk and therefore lower yield, loans in its loan portfolio, including primarily private mortgages in all geographical areas in which BBVA operates and corporate and business loans, particularly in Mexico and the United States. On the other hand, the decrease in yield on assets was partially offset by the active management of our investments in debt instruments (adjusting the duration of debt portfolios and increasing debt portfolio income in net interest income). The increase in cost of liabilities was due primarily to the increase in volume of customer deposits and a higher cost of liabilities, given the competitive environment in Spain, where fierce competition resulted in higher rates being paid by banks (including BBVA) in order to attract deposits. Finally, an upward curve in interest rates in the euro area has had a faster impact on the cost of liabilities than on the yield of assets.
Dividend income increased 19.3% to €529 million for the year ended December 31, 2010 from €443 million for the year ended December 31, 2009, due primarily to dividends from Telefónica, S.A. which increased from €1.0 to €1.3 per share.
Share of profit or loss of entities accounted for using the equity method increased to €335 million for the year ended December 31, 2010 from €120 million for the year ended December 31, 2009 due to the increase in our share of profits of CNCB following our exercise in April 2010 of a purchase option to increase our holding of CNCB from 10% to 15%, and to a lesser extent, the increase of profit of CNCB.
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The breakdown of fee and commission income for 2010 and 2009 is as follows:
Fee and commission income increased 1.5% to€5,382 million for the year ended December 31, 2010 from €5,305 million for the year ended December 31, 2009 due principally to the increase of fees related to banking services, specifically account maintenance and management and contingent liabilities.
The breakdown of fee and commission expenses for 2010 and 2009 is as follows:
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Fee and commission expenses decreased 3.4% to €845 million for the year ended December 31, 2010 from €875 million for the year ended December 31, 2009, primarily due to the decrease in fees and commissions assigned to third parties, which mainly related to our pensions business in Chile.
Net gains (losses) on financial assets and liabilities increased 61.4% to€1,441 million for the year ended December 31, 2010 from €892 for the year ended December 31, 2009, primarily due to a general recovery in market activity, and the sale of financial instruments to adjust portfolio durations. In addition, we have profited from high price volatility in sovereign debt markets rotating the durations of the portfolios, which generated income without consuming the unrealized capital gains present in certain portfolios as of December 31, 2010.
Net exchange differences decreased 30.6% to €453 million for the year ended December 31, 2010 from €652 million for the year ended December 31, 2009 due primarily to the devaluation of the Venezuelan Bolivar fuerte and losses in foreign currency trading.
Other operating income amounted to €3,543 million for the year ended December 31, 2010, a 4.2% increase compared to €3,400 million for the year ended December 31, 2009, due primarily to the increase of non-banking product sales, primarily real estate inventories sales and a greater contribution of the insurance business.
Other operating expenses for the year ended December 31, 2010, amounted to €3,248 million, a 3.0% increase compared to the €3,153 million recorded for the year ended December 31, 2009 due to an adjustment for hyperinflation in Venezuela, the cost of sales, primarily real estate inventories sales, and a higher contribution to deposit guarantee funds in the countries in which we operate.
As a result of the foregoing, gross income for the year ended December 31, 2010 was€20,910 million, a 1.2% increase over the €20,666 million recorded for the year ended December 31, 2009.
Administration costs for the year ended December 31, 2010 were €8,207 million, a 7.1% increase from the €7,662 million recorded for the year ended December 31, 2009, due primarily to an increase in rent expenses related to the sale and leaseback of certain properties located in Spain during the third quarter of 2009, an increase in costs associated with image and brand identity (including new sponsorship arrangements with the U.S. National Basketball Association) and an increase related to growth plans in substantially all the geographical areas in which the Group operates. This investment process is accompanied by a gradual increase of the Group’s workforce in almost all of its areas, which has resulted in an increase in personnel expenses of 3.5% to €4,814 million for 2010 from€4,651 million for 2009. The table below provides a breakdown of personnel expenses for 2010 and 2009.
(In Millions of Euros)
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The table below provides a breakdown of general and administrative expenses for 2010 and 2009.
Depreciation and amortization for the year ended December 31, 2010 amounted to€761 million a 9.2% increase compared to €697 million recorded for the year ended December 31, 2009, due primarily to the amortization of software and tangible assets for own use.
Provisions (net) for the year ended December 31, 2010 amounted to €482 million, a 5.4% increase compared to €458 million recorded for the year ended December 31, 2009, primarily due to a significant increase in the provisions for substandard contingent liabilities primarily related to guarantees given on behalf of our clients. In addition, provisions (net) for the year ended December 31, 2009 were positively impacted by higher provision recoveries.
Impairment on financial assets (net) for the year ended December 31, 2010 amounted to €4,718 million, a 13.8% decrease compared to the €5,473 million recorded for the year ended December 31, 2009. Impairment on financial assets (net) was negatively affected in 2009 in Spain and in the United States by the significant increase in substandard loans from €8,540 million as of December 31, 2008 to€15,312 million as of December 31, 2009, mainly as a result of the deterioration of the economic environment. Impairment on financial assets (net) in 2010 continues to be impacted in Spain and in the United States by the challenging economic environment. The Group’s non-performing assets ratio was 4.1% as of December 31, 2010 compared to 4.3% as of December 31, 2009.
Net operating income for the year ended December 31, 2010 amounted to€6,742 million, a 5.7% increase over the €6,376 million recorded for the year ended December 31, 2009.
Impairment on other assets (net) for the year ended December 31, 2010 amounted to €489 million, a 69.8% decrease from the €1,618 million recorded for the year ended December 31, 2009. Impairment on other assets (net) for 2009 included impairment changes for goodwill of€1,097 million attributed to the significant decline in economic and credit conditions in the states in which the Group operates in the United States, whereas 2010 did not include any significant goodwill impairment changes. In addition, loan-loss provisions for foreclosures and real estate assets were increased as a result of the deterioration of the real estate business.
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Gains (losses) on derecognized assets not classified as non-current assets held for sale for the year ended December 31, 2010 amounted to a gain of €41 million, an increase from the€20 million gain recorded for the year ended December 31, 2009.
Negative goodwill for the year ended December 31, 2010 amounted to a gain of €1 million compared to a gain of €99 million for the year ended December 31, 2009. Negative goodwill for 2009 was due to the acquisition of certain assets and liabilities of Guaranty.
Gains (losses) in non-current assets held for sale not classified as discontinued operations for the year ended December 31, 2010, was €127 million, a decrease of 85.2% million compared to €859 million for the year ended December 31, 2009. In 2010 and 2009 there were capital gains of €273 million and€914 million, respectively, generated by the sale of 164 and 971 fixed assets, respectively (mainly branch offices and various individual properties) to a third-party real estate investor. BBVA signed a sale and leaseback long-term contract with such investor, which includes an option to repurchase the properties at fair values, exercisable by the Group on the agreed dates (in most cases, the termination date of each lease agreement).
As a result of the foregoing, income before tax operations for the year ended December 31, 2010 was €6,422 million, a 12.0% increase from the €5,736 million recorded for the year ended December 31, 2009.
Income tax for the year ended December 31, 2010 amounted to €1,427 million, a 25.1% increase from the €1,141 million recorded for the year ended December 31, 2009, due to higher income before tax and higher expenses tax.
As a result of the foregoing, net income for the year ended December 31, 2010 was €4,995 million, an 8.7% increase from the €4,595 million recorded for the year ended December 31, 2009.
Net income attributed to parent company for the year ended December 31, 2010 was €4,606 million, a 9.4% increase from the €4,210 million recorded for the year ended December 31, 2009.
Net income attributed to non-controlling interests for the year ended December 31, 2010 was €389 million, a 1.1% increase over the €385 million recorded for the year ended December 31, 2009, principally due to exchange rate impacts.
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Results of Operations by Business Area for 2011 Compared to 2010
SPAIN
Net fees and commissions
Other operating income and expenses (net)
Administrative costs
Provisions (net) and other gains (losses)
Net interest income of this business area for 2011 was €4,399 million, a 9.8% decrease compared to the €4,878 million recorded for 2010, due mainly to the upturn in interest rates in the Eurozone in 2011, which affected liability costs to a greater extent, and with a faster impact, than the return on assets. The decrease in net interest income is also the result of the extremely complex environment in which it has been produced, with restricted lending activity in Spain and more expensive wholesale funding due to the increased spread paid for Spain’s risk.
Net fees and commissions of this business area amounted to €1,468 million for 2011, a 12.2% decrease from the €1,672 million recorded for 2010, primarily due to the application of loyalty-based reductions to a greater number of customers and the fall in the volume of managed mutual funds.
Net gains (losses) on financial assets and liabilities and exchange differences of this business area for 2011 was a gain of €19 million compared with the €2 million gain recorded for 2010. The positive effect of exchanges differences (€51 million in 2011 compared with €3 million in 2010) was partially offset by the higher net losses on financial assets (€32 million in 2011 compared with €1 million in 2010).
Other operating income and expenses (net) of this business area for 2011 was a gain of €471 million, a 6.5% decrease from the €504 million gain recorded for 2010, primarily due to the increased contributions to the Deposit Guarantee Fund.
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As a result of the foregoing, gross income of this business area for 2011 was€6,357 million, a 9.9% decrease from the €7,055 million recorded for 2010.
Administrative costs of this business area for 2011 were €2,702 million, a 0.5% decrease from the €2,717 million recorded for 2010, primarily due to the decline in general and personnel expenses.
Impairment on financial assets (net) of this business for 2011 was €1,711 million, a 30.0% increase from the €1,316 million recorded for 2010 which is mainly attributable to the deterioration of the economic situation. This business area’s non-performing assets ratio remained stable during 2011 and was 4.8%, as of December 31, 2011, due to the decrease in loans and advances to customers and in substandard loans due to the write-off.
As a result of the foregoing, income before tax of this business area for 2011 was€1,914 million, a 39.4% decrease from the €3,160 million recorded in 2010.
Income tax of this business area for 2011 was €550 million, a 39.0% decrease from the €902 million recorded in 2010, primarily as result of the decrease in income before tax.
As a result of the foregoing, net income attributed to parent company of this business area for 2011 was €1,363 million, a 39.5% decrease from the €2,255 million recorded in 2010.
EURASIA
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The importance of this area is increasing both in terms of earnings and our balance sheet, primarily due to the contribution of Garanti starting in March 2011 and the increase of earnings from CNCB.
Net interest income of this business area for 2011 was€801 million, a 132.1% increase compared to the €345 million recorded for 2010.
Net fees and commissions of this business area amounted to €391 million for 2011, a 66.1% increase from the €236 million recorded for 2010.
Net gains and financial assets and liabilities and exchange differences of this business area for 2011 was €105 million, a 20.8% decrease compared with the €132 million recorded for 2010, primarily due to the negative impact of exchange rates.
Other operating income and expenses (net) of this business area for 2011 was a gain of€655 million, a 78.4% increase from the €367 million gain recorded for 2010, primarily due to the growing contribution of CNCB.
As a result of the foregoing, gross income of this business area for 2011 was €1,952 million, an 80.7% increase from the €1,080 million recorded for 2010.
Administrative costs of this business area for 2011 were €599 million, a 115.8% increase over the €278 million recorded for 2010.
Impairment on financial assets (net) of this business for 2011 was €149 million, a 66.3% increase from the €89 million recorded for 2010. The business area’s non-performing assets ratio increased to 1.5% as of December 31, 2011 from 0.9% as of December 31, 2010.
As a result of the foregoing, income before tax of this business area for 2011 was €1,170 million, a 73.3% increase from the €675 million recorded in 2010.
Income tax of this business area for 2011 was €143 million, a 61.7% increase from the €88 million recorded in 2010, primarily as result of the increase in income before tax.
As a result of the foregoing, net income attributed to parent company of this business area for 2011 was€1,027 million, a 74.8% increase from the €588 million recorded in 2010.
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MEXICO
As discussed above under “—Factors Affecting the Comparability of our Results of Operations and Financial Condition”, in 2011 the Mexican peso depreciated against the euro, resulting in a negative exchange rate effect on our income statement for 2011.
Net interest income of this business area for 2011 was €3,827 million, a 3.8% increase from the €3,688 million recorded for 2010, due primarily to increased business activity, with greater volumes of lending and customer funds, and sound price management.
Net fees and commissions of this business area amounted to €1,194 million for 2011, a 3.2% decrease from the €1,233 million recorded for 2010, primarily as a result of the exchange rate effect. Assuming constant exchange rates, this income remained at the same level as in the previous year.
Net gains on financial assets and liabilities and exchange differences of this business area for 2011 amounted to €302 million, a 23.4% decrease from the €395 million for 2010, primarily due to the lower intermediation income received as a result of the financial markets situation.
Other operating income and expenses (net) of this business area for 2011, was a gain €227 million, a 26.8% increase from the €179 million gain recorded for 2010, principally due to growth in the insurance business.
As a result of the foregoing, gross income of this business area for 2011, was €5,550 million, a 1.0% increase from the €5,496 million recorded for 2010 (assuming constant exchange rates, there would have been a 4.3% increase).
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Administrative costs of this business area for 2011 amounted to €1,905 million, a 5.1% increase from the €1,813 million recorded for 2010, primarily due to a three-year expansion and transformation plan implemented by BBVA Bancomer to take advantage of the long-term growth opportunities offered by the Mexican market.
Impairment on financial assets (net) of this business for 2011 was €1,180 million, a 4.0% decrease from the€1,229 million recorded for 2010, primarily due to the recovery in economic conditions in Mexico. However, the business area’s non-performing assets ratio increased to 3.5% as of December 31, 2011 from 3.2% as of December 31, 2010.
As a result of the foregoing, income before tax of this business area for 2011 was €2,299 million, a 0.8% increase from the €2,281 million recorded for 2010.
Income tax of this business area for 2011 was €555 million, a 2.6% decrease from the €570 million recorded for 2010.
Net income attributed to parent company of this business area for 2011 was €1,741 million, a 2.0% increase from the €1,707 million recorded for 2010.
SOUTH AMERICA
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As discussed above under “—Factors Affecting the Comparability of our Results of Operations and Financial Condition”, the average exchange rates of the currencies of the countries in which we operate in South America, except for the Chilean peso, against the euro, decreased in 2011, resulting in a negative impact on the results of operations of the South America business area expressed in euro.
Net interest income of this business area for 2011 was €3,164 million, a 26.8% increase from the €2,495 million recorded in 2011, mainly due to the increase in volume of customer loans and deposits during the period, combined with sound price management.
Net fees and commissions of this business area amounted to €1,077 million in 2011, a 12.6% increase from the €957 million recorded in 2010, primarily due to the increasing pace of business in most of the countries throughout region.
Net gains on financial assets and liabilities and exchange differences of this business area in 2011 were€477 million, a 7.2% decrease from the €514 million recorded in 2010, primarily due to the negative impact of exchange differences.
Other operating income and expenses (net) of this business area for 2011, was a loss of €261 million, a 55.3% increase from the loss of €168 million recorded for 2010, principally due to the impact of Venezuela as a hyperinflationary economy since 2009.
As a result of the foregoing, the gross income of this business area in 2011 was €4,457 million, a 17.4% increase from the €3,797 million recorded in 2010.
Administrative costs of this business area in 2011 were €1,884 million, a 22.6% increase from the €1,537 million recorded in 2010, primarily due to the implementation of growth plans.
Impairment on financial assets (net) of this business area in 2011 was €449 million, a 7.2% increase from the €419 million recorded in 2010, primarily due to the growth of loans and advances to customers. The business area’s non-performing assets ratio decreased to 2.2% as of December 31, 2011 from 2.5% as of December 31, 2010.
As a result of the foregoing, income before tax of this business area in 2011 amounted to€1,877 million, a 12.4% increase compared to the €1,670 million recorded in 2010.
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Income tax of this business area in 2011 was €390 million, a 1.7% decrease from the €397 million recorded in 2010 (assuming constant exchange rates, there would have been a 2.3% increase).
Net income attributed to parent company of this business area in 2011 was€1,007 million, a 13.2% increase from the €889 million recorded in 2010 (assuming constant exchange rates, there would have been a 16.2% increase).
As discussed above under “—Factors Affecting the Comparability of our Results of Operations and Financial Condition”, in 2011 the U.S. dollar depreciated against the euro on average terms, resulting in a negative exchange rate effect on our income statement in 2011.
Net interest income of this business area for 2011 was €1,590 million, an 11.4% decrease from the €1,794 million recorded in 2010, primarily due to the strategies implemented by the business area to reduce the loan portfolio risk. Our developer and construction portfolios, which have high interest rates but also represents high risks, have contracted significantly, while mortgage loans and individual loans and lending to the industrial and commercial sector, which entail a lower risk and therefore have a narrower spread, grew.
Net fees and commissions of this business area in 2011 were €632 million, a 2.9% decrease from the €651 million recorded in 2010, due primarily to the exchange rate effect (assuming constant exchange rates, there would have been a 1.1% increase).
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Net gains (losses) on financial assets and liabilities and exchange differences of this business area in 2011 were €140 million, a 10.6% decrease from the €156 million recorded in 2010, mainly due to the turmoil in the markets.
Other operating income and expenses (net) of this business area in 2011 were a loss of €85 million, compared to a loss of €50 million recorded in 2010 mainly due to higher contributions to the Federal Deposit Insurance Corporation (FDIC).
As a result of the foregoing, gross income of this business area in 2011 was €2,277 million, a 10.7% decrease from the €2,551 million recorded in 2010.
Administrative costs of this business area in 2011 were €1,321 million, a 0.3% increase from the €1,318 million recorded in 2010.
Depreciation and amortization of this business area for 2011 was €170 million, a 14.8% decrease from €199 million in 2010.
Impairment on financial assets (net) of this business area for 2011 was €346 million, a 50.9% decrease from the€703 million recorded for 2010, primarily due to the improvement in the loan-book mix. The non-performing assets ratio of this business area as of December 31, 2011 decreased to 3.6% from 4.4% as of December 31, 2010.
Provisions (net) and other gains (losses) for 2011 reflected losses of €1,501 million, compared to the€22 million losses recorded for 2010, due primarily to impairment losses for goodwill (totaling €1,444 million). This goodwill adjustment is of an accounting nature and does not have any negative impact on the liquidity or capital adequacy of either the business area or the Group.
As a result of the foregoing, the income before tax of this business area for 2011 was a loss of €1,061 million, compared to a gain of €309 million recorded in 2010.
Income tax of this business area for 2011 was a gain of €339 million, compared to a loss of €69 million recorded in 2010, due to the loss before tax referred to above.
Net income attributed to parent company of this business area for 2011 was a loss of €722 million, compared to a gain of€239 recorded in 2010.
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CORPORATE ACTIVITIES
Net interest income of this business area for 2011 was a loss of €621 million compared to a gain of€121 million recorded in 2010. Net interest income has been negatively affected by the rising cost of wholesale finance.
Net fees and commissions of this business area amounted to a loss of €202 million for 2011, a 4.4% decrease from the €211 million loss recorded for 2010.
Net gains (losses) on financial assets and liabilities and exchange differences of this business area for 2011 were a gain of €437 million, a 37.2% decrease from the €696 million gain recorded in 2010, primarily due to the absence of earnings from portfolio sales and the loss of value of the assets as a result of the turmoil in the markets.
Other operating income and expenses (net) of this business area for 2011 was a gain of€359 million, a 10.0% increase from the €326 million gain recorded in 2010. It is primarily composed of Telefónica, S.A.’s dividends, which increased from €1.30 per share in 2010 to €1.52 per share in 2011.
As a result of the foregoing, gross income of this business area for 2011 was a loss of€27 million, compared with a gain of €932 million in 2010.
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Administrative costs of this business area for 2011 were €692 million, a 27.1% increase from the €544 million recorded in 2010, primarily due to the increase in costs associated with certain investments that are currently being undertaken including for the upgrading of systems, infrastructure and image and brand identity.
Depreciation and amortization of this business area for 2011 was €269 million, a 17.1% increase from the €229 million recorded in 2010.
Impairment on financial assets (net) of this business for 2011 was €392 million compared with €961 million recorded for 2010, when higher provisions for loan losses were made to increase the Group’s coverage ratio in light of the adverse economic conditions.
Provisions (net) and other gains (losses) for 2011 was a loss of €1,050 million, a 20.7% increase from a loss of €870 million for 2010, primarily due to an increase in provisions for foreclosed assets and real estate assets designed to maintain coverage at an adequate level.
As a result of the foregoing, income before tax of this business area for 2011 was a loss of €2,430 million, compared to a loss of €1,673 million in 2010.
Income tax of this business area for 2011 was €1,015 million in income, a 69.0% increase from €600 million in income recorded for 2010.
Net income attributed to parent company of this business area for 2011 was a loss of €1,413 million, compared to a loss of €1,072 million in 2010.
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Results of Operations by Business Area for 2010 Compared to 2009
Net interest income of this business area for 2010 was €4,878 million, a 12.4% decrease compared to the €5,571 million recorded for 2010, primarily due to the decrease in yield on assets, whereas the cost of liabilities increased.
The decrease in yield on assets was due primarily to the fact that the decrease in market interest rates during 2009 was gradually reflected in the yield of variable mortgage loans during the year 2009, whereas at the beginning of 2010 this decrease was largely completed and affected most of 2010. Additionally, this business area made continued efforts to gradually increase the relative weight of loan portfolios with lower risk and, therefore, lower spread (for example, mortgage loans) instead of loan portfolios with higher risk (for example, customer loans). The increase in cost of liabilities was due primarily to the increase in volume of customer deposits and the higher cost of liabilities given the competitive environment in Spain where fierce competition resulted in higher rates being paid by banks (including BBVA) in order to attract deposits. Finally, the upward curve in interest rates in the euro area has had a faster impact on the cost of liabilities than on the yield on assets.
Net fees and commissions of this business area amounted to €1,672 million for 2010, a 5.2% decrease from the €1,763 million recorded for 2009, primarily due to the application of loyalty-based reductions to a greater number of customers and the fall in the volume of managed mutual funds.
Net gains (losses) on financial assets and liabilities and exchange differences of this business area for both 2010 and 2009 was approximately €2 million.
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Other operating income and expenses (net) of this business area for 2010 was a gain of €504 million, a 6.6% decrease from the €539 million gain recorded for 2009, primarily due to the lower earnings of our insurance activity.
As a result of the foregoing, gross income of this business area for 2010 was €7,055 million, a 10.4% decrease from the €7,875 million recorded for 2009.
Administrative costs of this business area for 2010 was €2,717 million, a 1.1% decrease from the €2,747 million recorded for 2009, primarily due to the decline in general and administrative expenses, principally through continued streamlining of the branch network, and the Group’s transformation plan, which helped to reduce wages and salaries.
Impairment on financial assets (net) of this business for 2010 was €1,316 million, a 27.8% decrease from the €1,822 million recorded for 2009. Although credit conditions generally worsened in Spain during 2010 (including as a result of the continuous decrease in value of domestic real estate collateral), our charge-offs related to our domestic portfolio declined during the year for several reasons. First, the base for estimating incurred losses determined collectively in performing loans remained relatively stable compared with 2009. Second, the domestic NPA ratio declined modestly during 2010 (4.8% as of December 31, 2010 compared with 4.9% as of December 31, 2009), following the significant jump in the domestic NPA ratio in 2009, which resulted in fewer charge-offs being required in respect of incurred losses in impaired loans. Finally, our new credit quality requirements implemented in 2010 both improved our recovery rates and, by focusing on products with lower risk, our product mix, resulting in a significantly lower level of domestic charge-offs for 2010 compared with 2009.
As a result of the foregoing, income before tax of this business area for 2010 was €3,160 million, an 18.8% decrease from the €3,890 million recorded in 2009.
Income tax of this business area for 2010 was €902 million, a 16.8% decrease from the €1,085 million recorded in 2009, primarily as result of the decrease in income before tax.
As a result of the foregoing, net income attributed to parent company of this business area for 2010 was€2,255 million, a 19.5% decrease from the €2,801 million recorded in 2009.
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Net interest income of this business area for 2010 was €345 million, a 10.7% decrease compared to the €387 million recorded for 2009, principally due to the decrease in the activity of foreign branches, mainly the Brussels and London branches.
Net fees and commissions of this business area amounted to €236 million for 2011, a 5.9% increase from the €222 million recorded for 2009.
Net gains (losses) on financial assets and liabilities and exchange differences of this business area for 2010 was a gain of €132 million compared with the €131 million gain recorded for 2009.
Other operating income and expenses (net) of this business area for 2010 was a gain of €367 million, a 72.9% increase from the €212 million gain recorded for 2009, primarily due to the growing contribution of CNCB.
As a result of the foregoing, gross income of this business area for 2010 was €1,080 million, a 13.4% increase from the €953 million recorded for 2009.
Administrative costs of this business area for 2010 were €278 million, a 7.9% increase over the €258 million recorded for 2009.
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Impairment on financial assets (net) of this business for 2010 was €89 million, a 99.0% increase from the €45 million recorded for 2009. The business area’s non-performing assets ratio increased to 0.9% as of December 31, 2010 from 0.7% as of December 31, 2009.
As a result of the foregoing, income before tax of this business area for 2010 was €675 million, a 10.5% increase from the €611 million recorded in 2009.
Income tax of this business area for 2010 was €88 million, a 36.3% decrease from the €139 million recorded in 2009.
As a result of the foregoing, net income attributed to parent company of this business area for 2010 was €588 million, a 24.3% increase from the €473 million recorded in 2009.
In 2010, the average Mexican peso-to-euro exchange rate decreased compared to the average exchange rate in 2009 resulting in a positive exchange rate effect on the income statement for 2010.
Net interest income of this business area for 2010 was €3,688 million, an 11.5% increase from the €3,307 million recorded for 2009, due primarily to the exchange rate effect (assuming constant exchange rates, there would have been a 0.7% decrease due to the decrease in market interest rates).
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Net fees and commissions of this business area amounted to €1,233 million for 2010, a 14.5% increase from the €1,077 million recorded 2009 primarily as a result of the exchange rate effect (assuming constant exchange rates there would have been a 1.9% increase, due primarily to the increased transactional services fees and to greater fees related to securities and our pension fund administration business, Afore BBVA Bancomer).
Net gains on financial assets and liabilities and exchange differences of this business area for 2010 amounted to €395 million, a 6.6% increase from the €370 million for 2009, primarily as a result of the exchange rate effect (assuming constant exchange rates, there would have been a 5.1% decrease, principally due to market volatility).
Other operating income and expenses (net) of this business area for 2010, was a gain of€179 million, a 54.8% increase from the €116 million gain recorded for 2009, principally due to growth in the insurance business.
As a result of the foregoing, gross income of this business area for 2010, was €5,496 million, a 12.8% increase from the €4,870 million recorded for 2009 (assuming constant exchange rates, there would have been a 0.5% increase).
Administrative costs of this business area for 2010 amounted to €1,813 million, a 21.8% increase from the €1,489 million recorded for 2009 (assuming constant exchange rates, there would have been an 8.4% increase), primarily due to a three-year expansion and transformation plan implemented by BBVA Bancomer to take advantage of the long-term growth opportunities offered by the Mexican market.
Impairment on financial assets (net) of this business for 2010 was €1,229 million, a 19.4% decrease from the€1,525 million recorded for 2009, primarily due to the recovery in economic conditions in Mexico. The business area’s non-performing assets ratio decreased to 3.2% as of December 31, 2010 from 4.3% as of December 31, 2009.
As a result of the foregoing, income before tax of this business area for 2010 was €2,281 million, a 28.8% increase from the €1,770 million recorded for 2009.
Income tax of this business area for 2010 was €570 million, a 38.8% increase from the €411 million recorded for 2009, principally due to an increase in the tax rate in Mexico as of January 1, 2010.
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Net income attributed to parent company of this business area for 2010 was€1,707 million, a 25.7% increase from the €1,357 million recorded for 2009, primarily due to the exchange rate effect (assuming constant exchange rates, the increase would have been 11.9%).
The appreciation in 2010 of all the currencies in the countries in which we operate in South America against the euro (except for the Venezuelan Bolivar fuerte, which was devalued at the beginning of 2010, and the average exchange rate of the Argentine peso) positively affected the results of operations of certain of our Latin American subsidiaries in euro terms. However, the impact of the devaluation of Venezuelan Bolivar fuerte is higher than the positive effect of the appreciation of most of the rest of the currencies and, therefore, movements in exchange rates had a negative overall impact on this business area’s volume of business, balance sheet and, to a lesser extent, earnings in 2010.
Net interest income in 2010 was €2,495 million, a 2.8% decrease from the €2,566 million recorded in 2009. This decrease was primarily due to the exchange rate effect (assuming constant exchange rates, there would have been an 11.1% increase), which offset an increase of interest income mainly due to the increase in volume of customer loans during the period in all geographical regions of this business area.
Net fees and commissions of this business area amounted to €957 million in 2010, a 5.4% increase from the €908 million recorded in 2009, primarily due to the decrease in fees and commissions paid to third parties mainly related to our pensions business in Chile.
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Net gains on financial assets and liabilities and exchange differences of this business area in 2010 were €514 million, a 26.7% increase from the €405 million recorded in 2009, primarily as a result of the valuation of U.S. dollar positions in Venezuela due to the devaluation of the Venezuelan Bolivar fuerte and the appreciation of the U.S. dollar against the euro.
Other operating income and expenses (net) of this business area for 2010, was a loss of €168 million, a 30.7% decrease from the loss of €242 million recorded for 2009, principally due to the devaluation of the Venezuelan Bolivar peso fuerte and to the impact of Venezuela having been a hyperinflationary economy since 2009.
As a result of the foregoing, the gross income of this business area in 2010 was €3,797 million, a 4.4% increase from the €3,637 million recorded in 2009.
Administrative costs of this business area in 2010 were €1,537 million, a 5.0% increase from the €1,465 million recorded in 2009, primarily due to the implementation of growth plans.
Impairment on financial assets (net) of this business area in 2010 was €419 million, a 2.8% decrease from the €431 million recorded in 2009. The business area’s non-performing assets ratio decreased to 2.5% as of December 31, 2010 from 2.7% as of December 31, 2009.
As a result of the foregoing, income before tax of this business area in 2010 amounted to €1,670 million, a 6.0% increase compared to the €1,575 million recorded in 2009 (assuming constant exchange rates, there would have been an 11.3% increase).
Income tax of this business area in 2010 was €397 million, a 1.7% decrease from the €404 million recorded in 2009 (assuming constant exchange rates, there would have been a 2.0% increase).
Net income attributed to parent company of this business area in 2010 was €889 million, a 14.1% increase from the€780 million recorded in 2009 (assuming constant exchange rates, there would have been a 16.5% increase).
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THE UNITED STATES
The average U.S. dollar to euro exchange rate in 2010 was higher than the average exchange rate in 2009, resulting in a positive exchange rate effect on the income statement in 2010.
In addition, as explained in “Item 4. Information on the Company—History and Development of the Company—Capital Expenditures” on August 21, 2009, BBVA Compass acquired certain assets and liabilities of Guaranty Bank (“Guaranty”) from the FDIC through a public auction for qualified investors. This acquisition affects the comparability of the figures in 2010 since these assets and liabilities were included in our balance sheet, and therefore generated interest income and expenses, for the twelve months ended December 31, 2010 compared to only approximately four months (from the August 21 acquisition date to December 31, 2009) in 2009.
Net interest income in 2010 was €1,794 million, a 6.8% increase from the €1,679 million recorded in 2009, primarily due to the impact of the acquisition of Guaranty referred to above and the exchange rate effect (assuming constant exchange rates, there would have been a 1.3% increase).
Net fees and commissions of this business area in 2010 were €651 million, a 6.4% increase from the €612 million recorded in 2009, due primarily to the integration of Guaranty and the exchange rate effect (assuming constant exchange rates, there would have been a 0.3% increase).
Net gains on financial assets and liabilities and exchange differences of this business area in 2010 were €156 million, a 0.1% increase compared to those recorded in 2009.
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Other operating income and expenses (net) of this business area in 2010 were a loss of €50 million, compared to a loss of€34 million recorded in 2009 mainly due to higher contributions to the deposit guarantee fund.
As a result of the foregoing, gross income of this business area in 2010 was €2,551 million, a 5.8% increase from the €2,412 million recorded in 2009.
Administrative costs of this business area in 2010 were €1,318 million, a 13.7% increase from the €1,159 million recorded in 2009, primarily due to the integration of Guaranty and the exchange rate effect (assuming constant exchange rates, there would have been an 8.0% increase).
Depreciation and amortization of this business area for 2010 was €199 million, a 3.1% decrease from €205 million in 2009.
Impairment on financial assets (net) of this business for 2010 was €703 million, a 50.6% decrease from the€1,424 million recorded for 2009, primarily due to the fact that impairment on financial assets (net) was negatively affected in 2009 by the write-off of impaired assets as a result of the significant deterioration of economic and credit conditions in the states of the United States in which the business area operates. The value of collateral was lower than the commercial real estate loan portfolio value and, as a consequence, a write-off for the difference and additional provisions were set aside in 2009 to maintain the coverage ratio comparable to that of the prior year. The non-performing assets ratio of this business area as of December 31, 2010 increased to 4.4% from 4.2% as of December 31, 2009.
Provisions (net) and other gains (losses) for 2010 reflected losses of €22 million, compared to the€1,051 million losses recorded for 2009. This item was negatively affected in 2009 due primarily to impairment losses for goodwill (€1,097 million) attributed to the significant deterioration in economic and credit conditions in the states of the United States in which the business area operates.
As a result of the foregoing, the income before tax of this business area for 2010 was €309 million, compared to a loss of€1,428 million recorded in 2009.
Income before tax of this business area for 2010 was a loss of €68 million compared to a gain of €478 million recorded in 2009 due to the loss before tax referred to above.
Net income attributed to parent company of this business area for 2010 was €239 million, compared to a loss of€950 recorded in 2009.
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Year Ended December 31,
Net interest income of this business area for 2010 was €121 million, a 67.5% decrease from the €372 million recorded in 2009. Net interest income in 2011 was negatively affected by the end of the recovery in mortgage lending following the fall in interest rates in 2009, and by upward pressure in the interest rate curve in the Eurozone.
Net fees and commissions of this business area amounted to a loss of€211 million for 2010, a 38.6% increase from the €152 million loss recorded for 2009, primarily due to an increase in issuance fees paid to underwriters by the Group.
Net gains (losses) on financial assets and liabilities and exchange differences of this business area for 2010 were a gain of €696 million, a 44.9% increase over the €480 million gain recorded in 2009, primarily due to an increase in sales of financial assets from the ALCO portfolio, which has generated significant capital gains by taking advantage of price volatility in the sovereign bond markets during the first half of 2010.
Other operating income and expenses (net) of this business area for 2010 was a gain of€326 million, a 48.7% increase from the €219 million gain recorded in 2009. It is primarily composed of dividends from Telefónica, S.A. which increased from €1.0 to €1.3 per share.
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As a result of the foregoing, gross income of this business area for 2010 was a gain of €932 million, a 1.4% increase from the €919 million gain recorded in 2009.
Administrative costs of this business area for 2010 were €544 million, equal to those recorded in 2009.
Depreciation and amortization of this business area for 2010 was €229 million, a 17.9% increase from the €195 million recorded in 2009.
Impairment on financial assets (net) of this business for 2010 was €961 million compared to€226 million recorded for 2009, principally due to continuing provisions for loan losses designed to increase the Group’s coverage ratio in light of economic conditions.
Provisions (net) and other gains (losses) for 2010 was a loss of €870 million, a 36.6% increase from a loss of €637 million for 2009, primarily due to an increase in provisions for foreclosed assets and real estate assets designed to maintain coverage at an adequate level.
As a result of the foregoing, income before tax of this business area for 2010 was a loss of €1,673 million, compared to a loss of €683 million recorded in 2009.
Income tax of this business area for 2010 was €600 million in income, a 43.2% increase from €419 million in income recorded for 2009.
Net income attributed to parent company of this business area for 2010 was a loss of €1,072 million, compared to a loss of €251 million in 2009.
B. Liquidity and Capital Resources
Liquidity risk management and controls are explained in Note 7.3 to the Consolidated Financial Statements. In addition, information on outstanding contractual maturities of assets and liabilities is provided in Note 7.5 to the Consolidated Financial Statements. For information concerning our short-term borrowing, see “Item 4. Information on the Company—Selected Statistical Information—LIABILITIES—Short-term Borrowings”.
Liquidity and finance management of the BBVA Group’s balance sheet seeks to fund the growth of the banking business at suitable maturities and costs, using a wide range of instruments that provide access to a large number of alternative sources of finance. A core principle in the BBVA Group’s
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liquidity and finance management is the financial independence of its banking subsidiaries. This aims to ensure that the cost of liquidity is correctly reflected in price formation and that there is sustainable growth in the lending business.
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 with borrowings from the Bank of Spain and from the European Central Bank (“ECB”). See Note 9 to the Consolidated Financial Statements for information on our borrowings from central banks.
The following table shows the balances as of December 31, 2011, 2010 and 2009 of our principal sources of funds (including accrued interest, hedge transactions and issue expenses):
Deposits from central banks
Deposits from credit institutions
Debt certificates
Subordinated liabilities
Other financial liabilities
Customer deposits amounted to€282,173 million as of December 31, 2011, compared to €275,789 million as of December 31, 2010 and €254,183 million as of December 31, 2009. The increase from December 31, 2010 to December 31, 2011 was primarily caused by an increase in short-term time deposits in the domestic sector and relatively low-cost funds in the non-domestic sector.
Our customer deposits, excluding assets sold under repurchase agreements, amounted to €237,686 million as of December 31, 2011 compared to €234,302 million as of December 31, 2010 and €239,193 million as of December 31, 2009.
Amounts due to credit institutions
Amounts due to credit institutions, including central banks, amounted to€92,503 million as of December 31, 2011, compared to €68,180 million as of December 31, 2010 and €70,312 million as of December 31, 2009. The increase as of December 31, 2011 compared to December 31, 2010, was related to repurchase agreements and increased deposits from central banks, mainly from the ECB long-term financing.
Deposits from Credit Entities
Deposits from Central Banks
Total due to Credit Institutions
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Capital markets
We have continued making debt issuances in the domestic and international capital markets in order to finance our activities and as of December 31, 2011 we had €81,930 million of senior debt outstanding, comprising €74,429 million in bonds and debentures and €7,501 million in promissory notes and other securities, compared to €85,179 million, €71,964 million and€13,215 million outstanding as of December 31, 2010, respectively (€99,939 million,€70,357 million and€29,582 million outstanding, respectively, as of December 31, 2009). See Note 23.3 to the Consolidated Financial Statements.
In addition, we had a total of €12,781 million in subordinated debt and €1,760 million in preferred securities outstanding as of December 31, 2011, compared to €11,569 million and€5,202 million outstanding as of December 31, 2010, respectively. The decrease on preferred securities is due to the exchange offer described in Note 23.4 of the Consolidated Financial Statements by BBVA, which amounted to €3,430 million.
The breakdown of the outstanding subordinated debt and preferred securities by entity issuer, maturity, interest rate and currency is disclosed in Appendix VIII of the Consolidated Financial Statements.
The following is a breakdown as of December 31, 2011 of the maturities of our debt certificates (including bonds) and subordinated liabilities, disregarding any valuation adjustments and accrued interest:
Debt certificates (including bonds)
Generation of Cash Flow
We operate in Spain, Mexico, the United States and over 30 other countries, mainly in Europe, Latin America, and Asia. Our banking subsidiaries around the world, including BBVA Compass, are subject to supervision and regulation by a variety of regulatory bodies relating to, among other things, the satisfaction of minimum capital requirements. The obligation to satisfy such capital requirements may affect the ability of our banking subsidiaries, including BBVA Compass, to transfer funds to us in the form of cash dividends, loans or advances. In addition, under the laws of the various jurisdictions where our subsidiaries, including BBVA Compass, are incorporated, dividends may only be paid out of funds legally available therefor. For example, BBVA Compass is incorporated in Alabama and under Alabama law it is not able to pay any dividends without the prior approval of the Superintendent of Banking of Alabama if the dividend would exceed the total net earnings for the year combined with the bank’s retained net earnings of the preceding two years.
Even where minimum capital requirements are met and funds are legally available therefore, the relevant regulator could advise against the transfer of funds to us in the form of cash dividends, loans or advances, for prudence reasons or otherwise.
There is no assurance that in the future other similar restrictions will not be adopted or that, if adopted, they will not negatively affect our liquidity. The geographic diversification of our businesses, however, could help to limit the effect on the Group any restrictions that could be adopted in any given country.
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We believe that our working capital is sufficient for our present requirements and to pursue our planned business strategies.
See Note 53 of the Consolidated Financial Statements for additional information on our Consolidated Statements of Cash Flows.
Capital
Under the Bank of Spain’s capital adequacy regulations as of December 31, 2011, 2010 and 2009, 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, 2011, this ratio was 10.9%, down from 11.9% as of December 31, 2010, and our stockholders’ equity exceeded the minimum level required by 36.5%, down from 48.5% at the prior year end. As of December 31, 2009, this ratio was 12.9% and our stockholders’ equity exceeded the minimum level required by 37.9%.
Based on the framework of the Basel II and using such additional assumptions as we consider appropriate, we have estimated that as of December 31, 2011, 2010 and 2009 our consolidated Tier I risk-based capital ratio was 10.3%, 10.5% and 9.4%, respectively, and our consolidated total risk-based capital ratio (consisting of both Tier I capital and Tier II capital) was 12.9%, 13.7% and 13.6%, respectively. The Basel II recommends that these ratios be at least 4% and 8%, respectively.
The BBVA Group is taking steps to adapt to the ongoing regulatory changes, in particular with respect to the new capital requirements. See “Item 3. Key Information—Risk Factors—Risks Relating to Us and Our Business—We are subject to substantial regulation, and regulatory and governmental oversight. Adverse regulatory developments or changes in government policy could have a material adverse effect on our business, results of operations and financial condition” and “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Capital Requirements”. For qualitative and quantitative information on the principal risks we face, including market, credit, and liquidity risks as well as information on funding and treasury policies and exchange rate risk, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.
C. Research and Development, Patents and Licenses, etc.
In 2011, we continued to foster the use of new technologies as a key component of our global development strategy. We explored new business and growth opportunities, focusing on three major areas: emerging technologies; asset capture/exploitation; and the customer as the focal point of its banking business.
The BBVA Group is not materially dependent on the issuance of patents, licenses and industrial, mercantile or financial contracts or on new manufacturing processes in carrying out its business purpose.
D. Trend Information
The European financial services sector is likely to remain competitive. 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 or via acquisition of distressed entities. It is foreseeable that regulatory changes will take place in the future that will diminish barriers to such consolidation transactions. However, some of the hurdles that should be dealt with are the result of local preferences, such as consumer protection rules. If there are clear local consumer preferences, leading to specific local consumer protection rules, the same products cannot be sold across all the
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jurisdictions in which the Group operates, which reduces potential synergies. Certain challenges, such as the Value Added Tax regime for banks, do not however, relate to the interest or preferences of consumers.
The new Value Added Tax regime for banks is consistent with a more general trend of increasing pressure on financial systems. Within the Euro area, several countries are imposing new taxes on the financial industry, such as bank levies, financial activity taxes or financial transactions taxes. Differing tax regimes could set incentives for banks to operate, or transactions to take place, in those geographies where the tax pressure is lower. The implementation of new regulations in countries where we operate which results in increased tax pressure, or our inability to operate in geographies where the tax pressure is lower, could have a material impact on our profitability.
Regarding consumer protection rules, initiatives such as the review of the Markets in Financial Instruments Directive (MIFID) or the EU Commission consultation on the legislative steps for the Packaged Retail Investment Products (PRIPs) proposal could entail significant costs for our operations. In addition, it is unclear whether these initiatives will be applied equally across European countries, and differences in the implementation of these initiatives could affect the level-playing-field in the industry.
Regarding MIFID, on October 20, 2011, the European Commission presented a legislative proposal to review the MIFID in order to set clearer and more comprehensive rules across all financial instruments, in line with G-20 recommendations and specific U.S. Dodd-Frank Act provisions. The current proposal includes enhanced transparency requirements concerning trading activities in equity markets, tougher rules for algorithmic and high frequency trading activities and stricter requirements for portfolio management, investment advice and the offer of complex financial products such as structured products. These stricter rules on investment advice include, among others, telephone recordings, stricter categorization of clients, limits to “execution only” services for retail clients and stricter information duties for complex products. According to estimates published by the European Commission, the MIFID review is estimated to impose initial compliance costs of between€512 and €732 million and ongoing costs of between €312 and €586 million per year in the aggregate for participants in the EU banking sector. This represents an impact for initial and ongoing costs of 0.10% to 0.15% and 0.06% to 0.12%, respectively, of total operating spending in the EU banking sector. However, banking industry estimates are higher since the European Commission’s estimates do not account for all costs associated with the implementation of the MIFID review, including IT costs to be incurred in order to comply with the new transparency requirements. In addition, the MIFID review represents an overhaul of our business model, mainly regarding our investment advice services.
Regarding PRIPs, the measures planned by the European Commission aim to achieve higher transparency in the packaged retail investment products sector by requiring that certain mandatory information is made available to investors prior to making an investment decision and imposing stricter commercial practices. The MIFID provisions are considered to be a benchmark on conduct of business and the management of conflicts of interest. The preparation and provision to investors of the proposed mandatory information, as well as the revision of our commercial practices and the monitoring of the implementation of the new rules, are expected to entail costs for BBVA.
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:
the prolonged downturn in the Spanish economy and sustained unemployment above historical averages;
the restructuring and consolidation of the Spanish banking sector;
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doubts about European economies (both peripheral and core Eurozone economies) may continue in 2012 affecting financial markets;
uncertainties relating to the sustainability of any recovery in economic growth and interest rate cycles, especially in the United States, where the high current account deficit of the U.S. economy may translate into an upward adjustment of risk premium and higher global interest rates;
the fragility of the recovery from the financial crisis triggered by defaults on subprime mortgages and related asset-backed securities in the United States which has significantly disrupted the liquidity of financial institutions and markets;
the fragility of the Greek, Italian, Portuguese and Irish economies, which could affect the funding costs of Spanish financial institutions and the Spanish Government;
the effects of the withdrawal of significant monetary and fiscal stimulus programs and uncertainty over government responses to growing public deficits;
uncertainty over regulation of the financial industry, including the potential limitation on the size or scope of the activities of certain financial institutions, the regulation on systemic financial institutions or additional capital requirements, coming both from the Bank of Spain or globally;
uncertainty over the minimum solvency levels to be required in the future to the financial institutions by the Spanish government or the European authorities;
the continued downward adjustment in the housing sector in Spain, which could further negatively affect credit demand and household wealth, disposable income and consumer confidence. The existence of a significant over supply in the housing market in Spain and the pessimistic expectations about house price increases may postpone investment decisions, therefore negatively affecting mortgage growth rates;
continued volatility in capital markets or a downturn in investor confidence, linked to factors such as geopolitical risk, particularly in the Middle East. Continued or new crises in the region, such as the recent Iran-US tensions, could cause an increase in oil prices, generating inflationary pressures that could have a negative effect on interest rates and economic growth;
the effect that an economic slowdown may have over Latin American markets and fluctuations in local interest and exchange rates; and
although it is foreseeable that entry barriers to domestic markets in Europe will be lowered, our plans for expansion into other European markets could be affected by entry barriers in such countries by protectionist policies of national governments, which are generally higher in times of crisis. In addition, the new capital requirements could prevent financial entities from expanding their activities beyond their core business.
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E. Off-Balance Sheet Arrangements
In addition to loans, we had outstanding the following contingent liabilities and commitments at the dates indicated:
Rediscounts, endorsements and acceptances
Guarantees and other sureties
Other contingent liabilities
Total contingent liabilities
Commitments
Balances drawable by third parties:
Credit entities
Public authorities
Other domestic customers
Foreign customers
Total balances drawable by third parties
Other commitments
Total commitments
Total contingent liabilities and commitments
In addition to the contingent liabilities and commitments described above, the following table provides information regarding off-balance sheet funds managed by us as of December 31, 2011, 2010 and 2009:
Other managed assets
See Note 38 to the Consolidated Financial Statements for additional information with respect to our off-balance sheet arrangements.
F. Tabular Disclosure of Contractual Obligations
Our consolidated contractual obligations as of December 31, 2011 based on when they are due, were as follows:
Deposits from customers
Capital lease obligations
Operating lease obligations
Purchase obligations
Post-employment benefits(1)
Insurance commitments
Total(2)
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Represents the Group’s estimated aggregate amounts for pension commitments in defined-benefit plans and other post-employment commitments (such as early retirement and welfare benefits) for the next ten years, based on certain actuarial assumptions and an annual discount rate. Post-employment benefits are detailed in Note 26.2 to the Consolidated Financial Statements.
Interest to be paid is not included. The majority of the senior and subordinated debt was issued at variable rates. The financial cost of such issuances for 2011, 2010 and 2009 is detailed in Note 39.2 to the Consolidated Financial Statements.
Our Board of Directors is committed to a good corporate governance system in the design and operation of our corporate bodies in the best interests of the Company and our shareholders.
Our Board of Directors is subject to Board regulations that reflect and implement the principles and elements of BBVA’s concept of corporate governance. These Board regulations comprise standards for the internal management and operation of the Board and its committees, as well as the rights and obligations of directors in pursuit of their duties, which are contained in the directors’ charter.
Shareholders’ general meetings are subject to their own set of regulations on issues such as how they operate and what rights shareholders enjoy regarding such meetings. These establish the possibility of exercising or delegating votes over remote communication media.
Our Board of Directors has also approved a report on corporate governance for 2011, according to the guidelines set forth under Spanish regulation for listed companies.
Shareholders and investors may find the documents referred to above on our website (www.bbva.com).
Our website was created as an instrument to facilitate information and communication with shareholders. It provides special direct access to all information considered relevant to BBVA’s corporate governance system in a user-friendly manner.
A. Directors and Senior Management
We are managed by a Board of Directors that currently has 14 members.
Pursuant to article one of the Board regulations, Bank directorships may be executive or external. Executive directors have been conferred general powers to represent the Company on a permanent basis; they perform senior-management duties or are employees of the Company or its Group companies. All other Board members will be considered external.
Independent directors are those external directors who have been appointed in view of their personal and professional qualifications and can carry out their duties without being compromised by their relationships with us, our significant shareholders or our senior managements. Independent directors may not:
Have been employees or executive directors in Group companies, unless three or five years, respectively, have passed since they ceased to be so.
Receive any amount or benefit from the Company or its Group companies for any reason other than remuneration of their directorship, unless it is insignificant.
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Neither dividends nor supplementary pension payments that the director may receive from earlier professional or employment relationships shall be taken into account for the purposes of this section, provided they are not subject to conditions and the company paying them may not at its own discretion suspend, alter or revoke their accrual without breaching its obligations.
Be or have been a partner in the external auditors’ firm or in charge of the auditor’s report with respect to the Company or any other Group company during the last three years.
Be executive director or senior manager in any other company on which a Company executive director or senior manager is external director.
Maintain or have maintained during the past year an important business relationship with the Company or any of its Group companies, either on his/her own behalf or as relevant shareholder, director or senior manager of a company that maintains or has maintained such relationship.
Business relationships shall mean relationships as provider of goods and/or services, including financial, advisory and/or consultancy services.
Be significant shareholders, executive directors or senior managers of any organization that receives or has received significant donations from the Company or its Group during the last three years.
Those who are merely trustees on a foundation receiving donations shall not be ineligible under this letter.
Be married to or linked by equivalent emotional relationship, or related by up to second-degree family ties to an executive director or senior manager of the Company.
Have not been proposed by the Appointments Committee for appointment or renewal.
Fall within the cases described under letters a), e), f) or g) above, with respect to any significant shareholder or shareholder represented on the Board. In cases of family relationships described under letter g), the limitation shall not only apply to the shareholder, but also to the directors it nominates for the Company’s Board.
Directors owning shares in the Company may be independent providing they comply with the above conditions and their shareholding is not legally considered as significant.
Regulations of the Board of Directors
The principles and elements comprising our corporate governance are set forth in our Board regulations, which govern the internal procedures and the operation of the Board and its committees and directors’ rights and duties as described in their charter.
In December 2011, our Board of Directors resolved to amend the following articles of the Board regulations:
Article 1 (Conditions of directorship), to amend the definition of independent and proprietary directors;
Article 4 (Term of office), to amend the age limit for directors and to introduce a technical improvement regarding the term of directors co-opted pursuant to article 244 of the Corporate Enterprises Act;
Article 20 (Quorum and approval of resolutions), to adapt its wording to article 247.2 of the Corporate Enterprises Act;
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Article 24 (Meeting procedures), to include the possibility of holding Board meetings over remote communication media;
Article 26 (Composition of the Executive Committee), to amend the composition of the Executive Committee;
Article 36 (Functions of the Remuneration Committee), to adapt it to Royal Decree 771/2011, including amongst its functions the direct oversight of the remuneration of senior managers tasked with the Bank’s risk management and compliance functions; and
Article 40 (Rules of organization and operation of the Risks Committee), to include the Risks Committee’s power to request attendance at its meetings of persons with positions in the Group that are related to the Committee’s functions and to receive advice from experts.
The aforementioned amendments to the Board regulations were analyzed by the Executive Committee prior to their approval by the Board of Directors. The Board regulations can be read on the Bank’s corporate website (www.bbva.com)
The following provides a brief description of several significant matters covered in the regulations of the Board of Directors.
Appointment and Re-election of Directors
The proposals that the Board submits to the Company’s annual shareholders’ general meeting for the appointment or re-election of directors and the resolutions to appoint directors made by the Board of Directors shall be approved at the proposal of the Appointments Committee in the case of independent directors and on the basis of a report from said committee in the case of all other directors.
To such end, the committee assesses the skills, knowledge and experience required on the Board and the capacities the candidates must offer to cover any vacant seats. It evaluates how much time and work members may need to carry out their duties properly as a function of the needs that the Company’s governing bodies may have at any time.
Term of Directorships and Director Age Limit
Directors shall stay in office for the term defined by our bylaws (three years). If a director has been co-opted, they shall stay in office until the first shareholders’ general meeting is held. The general meeting may then ratify their appointment for the term of office remaining to the director whose vacancy they have covered through co-option, or else appoint them for the term of office established under our bylaws.
BBVA’s Board of Directors regulations establish an age limit for sitting on the Bank’s Board. Directors must present their resignation at the first Board meeting following the annual shareholders’ general meeting approving the accounts of the year in which they reach the age of seventy-five.
Performance of Directors’ Duties
Board members must comply with their duties as defined by legislation and by the bylaws in a manner that is faithful to the interests of the Company.
They shall participate in the deliberations, discussions and debates arising on matters put to their consideration and shall have sufficient information to be able to form a sound opinion on the questions
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corresponding to our governing bodies. They may request additional information and advice if they so require in order to perform their duties. Their participation in the Board’s meetings and deliberations shall be encouraged.
The directors may also request help from external experts with respect to business submitted to their consideration whose complexity or special importance makes it advisable.
Conflicts of Interest
The rules comprising the BBVA directors’ charter detail different situations in which conflicts of interest could arise between directors, their family members and/or organizations with which they are linked, and the BBVA Group. They establish procedures for such cases, in order to avoid conduct contrary to our best interests.
These rules help ensure directors’ conduct reflects stringent ethical codes, in keeping with applicable standards and according to core values of the BBVA Group.
Incompatibilities
Directors are also subject to a regime of incompatibilities, which places strict constraints on holding posts on governing bodies of Group companies or companies in which the Group has a holding. Non-executive directors may not sit on the boards of subsidiaries or related companies because of the Group’s holding in them, whilst executive directors may only do so if they have express authority.
Directors who cease to be members of the Bank’s Board may not offer their services to any other financial institution competing with the Bank or of its subsidiaries for two years after leaving, unless expressly authorized by the Board. Such authorization may be denied on the grounds of corporate interest.
Directors’ Resignation and Dismissal
Furthermore, in the following circumstances, reflected in the Board regulations, directors must tender their resignation to the Board and accept its decision regarding their continuity in office (formalizing said resignation when the Board so resolves):
When barred (on grounds of incompatibility or other) under prevailing legal regulations, under the bylaws or under the directors’ charter.
When significant changes occur in their professional situation or that may affect the condition by virtue of which they were appointed to the Board.
When they are in serious dereliction of their duties as directors.
When the director, acting as such, has caused severe damage to the Company’s assets or its reputation or credit, and/or no longer displays the commercial and professional honor required to hold a Bank directorship.
The Board of Directors
Our Board of Directors is currently comprised of 14 members.
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The following table sets forth the names of the members of the Board of Directors as of that 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 employment history.
Name
Birth Year
Current Position
Date Nominated
Date Re-elected
Present Principal OutsideOccupation andEmployment History(*)
Francisco González Rodríguez(1)
Ángel Cano Fernández(1)
Tomás Alfaro Drake(2)(3)
Juan Carlos Álvarez Mezquíriz(1)(3)
Ramón Bustamante y de la Mora(2)(5)
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José Antonio Fernández Rivero(3)(5)
Ignacio Ferrero Jordi(1)(4)
Belén Garijo López
Carlos Loring Martínez de Irujo(2)(4)
José Maldonado Ramos(1)(3)(4)
Enrique Medina Fernández(1)(5)
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José Luis Palao García-Suelto(2)(5)
Juan Pi Llorens(4)(5)
Susana Rodríguez Vidarte(2)(3)(4)
Where no date is provided, the position is currently held.
Member of the Executive Committee.
Member of the Audit and Compliance Committee.
Member of the Appointments Committee.
Member of the Compensation Committee.
Member of the Risk Committee.
Executive Officers or Management Committee (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:
Present Principal Outside Occupation andEmployment History(*)
Francisco González Rodríguez
Ángel Cano Fernández
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Eduardo Arbizu Lostao
Manuel González Cid
José María García Meyer-Dohner
Ignacio Deschamps González
Juan Asúa Madariaga
Jose Barreiro Hernández
Vicente Rodero Rodero
Carlos Torres Vila
Gregorio Panadero Illera
Manuel Castro Aladro
Ramón Monell Valls
Juan Ignacio Apoita Gordo
Manuel Sánchez Rodríguez
Where no date is provided, positions are currently held.
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Compensation
The provisions of BBVA’s bylaws that relate to compensation of directors are in strict accordance with the relevant provisions of Spanish law. The shareholders’ general meeting held on March 16, 2012 resolved to amend article 53 of our bylaws on the allocation of profit or losses (pursuant to article 273 of the Corporate Enterprises Act) and the inclusion, pursuant to article 217 of the Corporate Enterprises Act, of a new article 33 bis regarding the compensation of non-executive directors. These amendments are applicable as of 2012. Compensation of BBVA executive directors will continue to be regulated by article 50 bis of our bylaws.
In accordance with our revised bylaws, the compensation of the Bank’s non-executive directors will no longer be based on profit sharing, and has been replaced instead by an annual fixed remuneration system. In addition, our bylaws continue to contemplate that part of the non-executive directors’ compensation will consist in the delivery of shares, as approved by the shareholders’ general meeting of March 18, 2006.
As of the date of this Annual Report, the amendments referred to above are pending registration with the Commercial Registry. In addition, pursuant to article 8.1 of Royal Decree 1245/1995, of July 14, on the creation of banks, cross-border activity and other matters relating to the legal regime of financial institutions, the bylaw amendments approved in the shareholders’ general meeting held on March 16, 2012 are conditional on obtaining the authorization from the relevant authorities.
Remuneration of non-executive Directors
The remuneration paid to individual non-executive members of the Board of Directors in 2011 is indicated below, broken down by type of remuneration in thousand of euros:
Tomás Alfaro Drake
Juan Carlos Álvarez Mezquíriz
Ramón Bustamante y de la Mora
José Antonio Fernández Rivero(1)
Ignacio Ferrero Jordi
Carlos Loring Martínez de Irujo
José Maldonado Ramos
Enrique Medina Fernández
Jose Luis Palao García-Suelto(2)
Juan Pi Llorens(3)
Susana Rodríguez Vidarte
Total(4)
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José Antonio Fernández Rivero, apart from the amounts listed in the above table, also received a total of €652 thousand during 2011 in early retirement payments as a former member of the BBVA management.
José Luis Palao García-Suelto was appointed member of the Board on February 1, 2011.
Juan Pi Llorens was appointed member of the Board on July 27, 2011.
Rafael Bermejo Blanco, who stood down as director on March 29, 2011, received the total sum of€104 thousand in remuneration as member of the Board of Director and for his positions on certain of its Committees.
Remuneration of executive Directors
The remuneration paid to executive directors of the Bank in 2011 is indicated below, broken down by type of remuneration in thousands of euros:
Chairman and CEO
President and COO
Corresponds to the variable pay for 2010 paid in 2011.
In addition, the executive directors were paid remunerations in kind and in other forms in 2011 for a total amount of €32.5 thousand, of which€10.8 thousand correspond to the Chairman and CEO and €21.7 thousand pertain to the President and COO.
Remuneration of the members of the Management Committee (Comité de Dirección)
This section provides information on the members of the Management Committee who held this position as of December 31, 2011, excluding executive directors.
The remuneration paid in 2011 to the members of BBVA’s Management Committee amounted to €9,359 thousand in fixed remuneration and €14,296 thousand in variable remuneration accrued in 2010 and paid in 2011.
In addition, the members of the Management Committee received remuneration in kind and other items totaling €814 thousand in 2011.
New annual variable remuneration system
BBVA’s ordinary shareholders’ general meeting held on March 11, 2011 approved a new variable share-based remuneration system for BBVA’s executive team, including the executive directors.
This new system is based on a specific incentive for the members of the executive team (the “Incentive”). It consists of the annual allocation, to each beneficiary, of a number of units that serve as the basis for determining the number of shares that, if applicable, will correspond to each such beneficiary in the settlement of the Incentive based on the level of compliance with three indicators established by the annual shareholders’ general meeting: the Total Shareholders Return (TSR); the Group’s recurrent Economic Profit (EP); and the Group’s attributed net income.
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The total number of units assigned under the Incentive for 2011 was 155,000 for the Chairman and CEO, 117,000 for the President and COO and a total of 620,500 to all remaining members of the Management Committee who held that position on December 31, 2011.
This number of units will be divided in three parts associated to each one of the indicators based on the weights established at all times, and each one of these parts will be multiplied by a coefficient ranging from 0 and 2 based on the scale defined each year for each of the indicators.
This Incentive, together with the ordinary variable remuneration in cash that corresponds to each member of the executive team, constitutes its annual variable remuneration (the “Annual Variable Remuneration”).
The shareholders’ general meeting held on March 11, 2011, likewise established a new settlement and payment system for the Annual Variable Remuneration applicable to the categories of employees whose professional activities may significantly affect the Bank’s risk profile or who perform control functions. This includes executive directors and the rest of the members of the Management Committee, and was adapted in accordance with the requirements established in Directive 76/2010, which was transposed to Spanish law by means of Royal Decree 771/2011 of June 3, 2011 (“Royal Decree 771/2011”).
The new Annual Variable Remuneration settlement system applicable to the executive directors and the rest of the members of the Management Committee established that they will receive at least 50% of the total of said remuneration in shares.
To this effect, if the economic value of the shares resulting from the Incentive corresponding to each executive director or to each member of the Management Committee in its settlement does not equal at least 50% of the amount of their Annual Variable Remuneration, they will be provided, in shares, the proportion of their ordinary variable remuneration that, added to the value of the shares from the Incentive, is needed to satisfy the percentage indicated. For this calculation, the value of the shares is considered to be the average closing price of the BBVA shares corresponding to the trading sessions between December 15, 2011 and January 15, 2012.
Once the amount of cash and shares corresponding to the executive directors and remaining members of the Management Committee in the settlement of their Annual Variable Remuneration has been determined, the payment will be subject to the conditions set forth in the annual general shareholders’ meeting’s agreement in 2011 such that:
The payment of 50% of the Annual Variable Remuneration, both from the part in cash and the part paid in shares, will be deferred. The deferred amount will, when applicable, be paid out in thirds over the next three years.
The shares that are provided each year from the settlement of the Annual Variable Remuneration will be unavailable for one additional year from the date they are provided; however, the sale of the number of shares needed to pay the taxes arising from the provision of the shares will be permitted.
The payment of the Annual Variable Remuneration will be subject to the non-occurrence of any of the situations established by the Board of Directors that limit or impede their provision.
Once 2011 was closed, the Annual Variable Remuneration of the executive directors for 2011 was determined, applying the aforementioned conditions agreed upon by the annual shareholders’ general meeting in March 2011. It includes their ordinary variable remuneration and the Incentive for the executive team. Thus, in the first quarter of 2012, they will receive the settlement of the Annual Variable Remuneration corresponding to 2011:€999,731 and 155,479 BBVA shares for the Chairman
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and CEO; and €635,865 euros and 98,890 BBVA shares in the case of the President and COO. In both cases, the shares will be unavailable for one year from the date they are provided, in line with the aforementioned terms.
Furthermore, in the first quarter of the years 2013, 2014 and 2015, the executive directors will receive the amount of €333,244 and 51,826 BBVA shares in the case of the Chairman and CEO, and €211,955 and 32,963 BBVA shares in the case of the President and COO, corresponding to the deferred portion of the Annual Variable Remuneration of 2011.
The payment of the deferred portions of the Annual Variable Remuneration will be subject to the non-occurrence of any of the situations established by the Board of Directors that limit or impede their payment, and will be subject to the updating of the terms set out by the Board of Directors. In addition, the shares provided each year will be unavailable for one year from the date they are provided, in line with the aforementioned terms.
As of December 31, 2011, these amounts were recognized under the heading “Other liabilities—Accruals” of the consolidated balance sheet.
Multi-year variable share-based remuneration programs for executive directors and members of the Management Committee
Settlement of the multi-year variable share-based remuneration program for 2009-2010
In the first quarter of 2011, the Multi-year Variable Share-based Remuneration Program for 2009-2010 was settled for the members of BBVA’s executive team, including the executive directors and other members of the Management Committee. This had been approved by the annual shareholders’ general meeting of March 13, 2009 and resulted in, after applying the conditions established initially, a multiplier coefficient of 0 for the units allocated. Thus, the Program was settled with no shares being awarded to its beneficiaries.
Multi-year variable share-based remuneration program for 2010-2011
The Bank’s annual shareholders’ general meeting held on March 12, 2010 approved a Multi-Year Variable Share-based Remuneration Program for 2010/2011 designed for the members of BBVA’s executive team, including the executive directors and members of the Management Committee (hereinafter, the “2010-2011 Program”). The result is obtained by multiplying the number of units assigned at the start of the Program to each beneficiary by a coefficient, between 0 and 2, established based on the evolution of the Bank’s total shareholders return (TSR) in 2010-2011 as compared to the evolution of this same indicator in a group of 18 international reference banks.
The number of units allocated to the executive directors, in accordance with the agreement of the annual shareholders’ general meeting was 105,000 for the Chairman and CEO and 90,000 for the President and COO; and a total of 385,000 units were allocated for all remaining members of the Management Committee who held that position on December 31, 2011.
The aforementioned annual shareholders’ general meeting established that the shares, if applicable, arising from the settlement of the Program be awarded to the beneficiaries, who could have those shares available to them as follows: (i) 40 percent of the shares received will be freely transferable by the beneficiaries at the moment they are received; (ii) 30 percent of the shares received will be transferable one year after the settlement date of the Program; and (iii) the remaining 30 percent will be transferable starting two years after the settlement date of the Program.
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Once the 2010/2011 Program finalized on December 31, 2011, according to the conditions established initially, the determination of the TSR of BBVA and the 18 reference banks was made. BBVA held fourth place in the comparison table. Therefore, under the terms established by the annual shareholders’ general meeting, a multiplier coefficient of 2 was applied to the units allocated to each beneficiary. Thus, in the settlement of the Program, 210,000 BBVA shares were awarded to the Chairman and CEO; 180,000 BBVA shares were awarded to the President and COO; and 770,000 BBVA shares were awarded to all other members of the Bank’s Management Committee.
After this Program was established by the Board, Royal Decree 771/2011 was published demanding the application of the aforementioned deferment, unavailability and limitation regulations to the remuneration granted and still unpaid prior to it taking effect, referring to services rendered since 2010.
Thus, this standard and the requirements established in the aforementioned Royal Decree 771/2011 must be applied to the 2010/2011 Program. Therefore, the annual general shareholders’ meeting of the Bank set for March 16, 2012 will address the modification of the settlement and payment system of the 2010/2011 Program previously approved by the annual shareholders’ general meeting to adapt it to the terms established to that effect in Royal Decree 771/2011.
This change in the settlement and payment system will affect those Bank employees who, as beneficiaries of the 2010-2011 Program are considered to carry out professional activities that may significantly influence the Bank’s risk profile or who perform control functions. This includes, in all cases, all executive directors and other members of the Management Committee.
The new system indicates that executive directors and the remaining members of the Management Committee will only receive 50% of the shares prior to April 15, 2012 corresponding to them as a result of the settlement of the Program. They will receive the remaining 50% deferred in thirds over the years 2013, 2014 and 2015, respectively.
Those shares will also be subject to, according to the requirements of Royal Decree 771/2011, the unavailability criteria indicated in the section regarding the New Annual Variable Remuneration System; as such, they will be unavailable for a period of one year from the date on which they were awarded. Furthermore, the awarding of the deferred shares will be subject to the non-occurrence of any situation that impedes or limits the provision of the Annual Variable Remuneration, which is subject to being updated. The above is in accordance with that set out by the Bank’s Board of Directors.
Thus, in the application of this new settlement and payment system for the 2010-2011 Program, the executive directors will, as a result, receive 105,000 BBVA shares (in the case of the Chairman and CEO) and 90,000 shares (in the case of the President and COO) prior to April 15, 2012. Furthermore, on the same dates in the years 2013, 2014 and 2015, the executive directors will receive the amount of 35,000 BBVA shares in the case of the Chairman and CEO, and 30,000 BBVA shares in the case of the President and COO, corresponding to the deferred portion of this Program.
Scheme for remuneration of non-executive directors with deferred distribution of shares
BBVA has a remuneration system with deferred distribution of shares in place for its non-executive directors that was approved by the annual shareholders’ general meeting held on March 18, 2006 and renewed for an additional 5-year period through an agreement by the annual shareholders’ general meeting held on March 11, 2011.
This system consists in the annual allocation of a number of “theoretical shares” to the non-executive directors equivalent to 20% of the total remuneration received by each in the previous
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year. This is based on the average closing prices of the BBVA shares during the last sixty trading sessions prior to the dates of the ordinary general meetings approving the annual financial statements for each year.
The shares will be subject to being awarded, if applicable, to each beneficiary on the date he or she leaves the position of director for any reason except serious breach of duties.
The number of “theoretical shares” allocated to non-executive director deferred share distribution system beneficiaries in 2011, corresponding to 20% of the total remuneration received by each in 2010, is as follows:
José Antonio Fernández Rivero
Total(*)
Rafael Bermejo Blanco, who stood down as director on March 29, 2011, was also allocated 9,806 theoretical shares.
Pension commitments
The provisions registered as of December 31, 2011 for pension commitments to the President and COO are€16,831 thousand, of which€2,417 thousand were charged against 2011 earnings. As of this date, there are no other pension obligations to executive directors.
Also,€99 thousand in insurance premiums were paid on behalf of non-executive directors who are members of the Board of Directors.
The provisions registered as of December 31, 2011 for pension commitments for the Management Committee members, excluding executive directors, amounted to €60,312 thousand. Of these, €8,832 thousand were charged against 2011 earnings.
Termination of the contractual relationship
There were no commitments as of December 31, 2011 for the payment of compensation to executive directors, except as set forth below.
In the case of the President and COO, the contract lays down that in the event that he lose this status due to a reason other than his own will, retirement, disability or dereliction of duty, he shall take early retirement with a pension, which can be received as life income or common stock, equal to 75% of their pensionable salary if this occurs before he reaches the age of 55, or 85% after that age.
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C. Board Practices
Committees
Our corporate governance system is based on the distribution of functions between the Board, the Executive Committee and the other Board Committees, namely: the Audit and Compliance Committee; the Appointments Committee; the Compensation Committee; and the Risk Committee.
Executive Committee
Our Board of Directors is assisted in fulfilling its responsibilities by the Executive Committee (Comisión Delegada Permanente) of the Board of Directors. 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 the date of this Annual Report, BBVA’s Executive Committee was comprised of two executive directors and four external directors being three of them independent, as follows:
Position
Chairman
Members
Mr. Ángel Cano Fernández
Mr. Juan Carlos Álvarez Mezquíriz
Mr. Ignacio Ferrero Jordi
Mr. José Maldonado Ramos
Mr. Enrique Medina Fernández
According to our bylaws, the Executive Committee’s responsibilities include the following: to formulate and propose policy guidelines, the criteria to be followed in the preparation of programs and to fix targets, to examine the proposals put to it in this regard, comparing and evaluating the actions and results of any direct or indirect activity carried out by the Group; to determine the volume of investment in each individual activity; to approve or reject operations, determining methods and conditions; to arrange inspections and internal or external audits of all operational areas of the Group; and in general to exercise the faculties delegated to it by the Board of Directors.
Specifically, the Executive Committee is entrusted with evaluation of our system of corporate governance. This shall be analyzed in the context of our development and of the results we have obtained, taking into account any regulations that may be passed and/or recommendations made regarding best market practices and adapting these to our specific circumstances.
The Executive Committee shall meet on the dates indicated in the annual calendar of meetings and when the chairman or acting chairman so decides. During 2011, the Executive Committee met 18 times.
Audit and Compliance Committee
This committee shall perform the duties required under applicable laws, regulations and our bylaws. Essentially, it has authority from the Board to supervise the financial statements and the oversight of the Group.
The Board regulations establish that the Audit and Compliance Committee shall have a minimum of four members appointed by the Board in light of their know-how and expertise in accounting, auditing and/or risk management. They shall all be independent directors, one of whom shall act as chairman, also appointed by the Board. See “Item 16.A. Audit Committee Financial Expert”.
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As of the date of this Annual Report, the Audit and Compliance Committee members were:
Mr. Tomás Alfaro Drake
Mr. Ramón Bustamante y de la Mora
Mr. Carlos Loring Martínez de Irujo
Mrs. Susana Rodríguez Vidarte
The scope of its functions is as follows (for purposes of the below, “entity” refers to BBVA):
Report to the shareholders’ general meeting on matters that are raised at its meetings on matters within its competence.
Supervise the efficacy of the Company’s internal control and oversight, internal audit, where applicable, and the risk-management systems, and discuss with the auditors or audit firms any significant issues in the internal control system detected when the audit is conducted.
Supervise the process of drawing up and reporting regulatory financial information.
Propose the appointment of auditors or audit firms to the Board of Directors for it to submit the proposal to the shareholders’ general meeting, in accordance with applicable regulations.
Establish correct relations with the auditors or audit firms in order to receive information on any matters that may jeopardize their independence, for examination by the Committee, and any others that have to do with the process of auditing the accounts; as well as those other communications provided for in laws and standards of audit. It must unfailingly receive written confirmation by the auditors or audit firms each year of their independence with regard to the entity or entities directly or indirectly related to it and information on additional services of any kind provided to these entities by said auditors or audit firms, or by persons or entities linked to them as provided under Law 19/1988, July 12, on the auditing of accounts.
Each year, before the audit report is issued, to put out a report expressing an opinion on the independence of the auditors or audit firms. This report must, in all events, state the provision of any additional services referred to in the previous subsection.
Oversee compliance with applicable domestic and international regulations on matters related to money laundering, conduct on the securities markets, data protection and the scope of Group activities with respect to anti-trust regulations. Also to ensure that any requests for action or information made by official authorities in these matters are dealt with in due time and in due form.
Ensure that the internal codes of ethics and conduct and securities market trading, as they apply to Group personnel, comply with legislation and are appropriate for the Bank.
Especially to enforce compliance with provisions contained in BBVA Director’s Charter, and ensure that directors satisfy applicable standards regarding their conduct on the securities markets.
Any others that may have been allocated under these regulations or attributed to the committee by a Board of Directors resolution.
The committee shall also monitor the independence of external auditors. This entails the following two duties:
Ensuring that the auditors’ warnings, opinions and recommendations are followed.
Establishing the incompatibility between the provision of audit and the provision of consultancy services, unless there are no alternatives in the market to the auditors or
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companies in the auditors’ group of equal value in terms of their content, quality or efficiency. In such event, the committee must grant its approval, which can be done in advance by delegation to its chairman.
The committee selects the external auditor for the Bank and its Group, and for all the Group companies. It must verify that the audit schedule is being carried out under the service agreement and that it satisfies the requirements of the competent authorities and the Bank’s governing bodies. The committee will also require the auditors, at least once each year, to assess the quality of the Group’s internal oversight procedures.
The Audit and Compliance Committee meets as often as necessary to comply with its tasks, although an annual meeting schedule is drawn up in accordance with its duties. During 2011, the Audit and Compliance Committee met 12 times.
Executives responsible for control, internal audit and regulatory compliance can be invited to attend its meetings and, at the request of these executives, other staff from these departments who have particular knowledge or responsibility in the matters contained in the agenda, can also be invited when their presence at the meeting is deemed appropriate. However, only the committee members and the secretary shall be present when the results and conclusions of the meeting are evaluated.
The committee may engage external advisory services for relevant issues when it considers that these cannot be properly provided by experts or technical staff within the Group on grounds of specialization or independence.
Likewise, the committee can call on the personal cooperation and reports of any member of the Management Committee when it considers that this is necessary to carry out its functions with regard to relevant issues.
The committee has its own specific regulations, approved by the Board of Directors. These are available on our website and, amongst other things, regulate its operation.
Appointments Committee
The Appointments Committee is tasked with assisting the Board on issues related to the appointment and re-election of Board members.
This committee shall comprise a minimum of three members who shall be external directors appointed by the Board, which shall also appoint its chairman. However, the chairman and the majority of its members must be independent directors, in compliance with the Board regulations.
As of the date of this Annual Report, the members of the Appointments Committee were:
Mr. José Antonio Fernández Rivero
The duties of the Appointments Committee are as follows:
Draw up and report proposals for appointment and re-election of directors.
To such end, the Committee will evaluate the skills, knowledge and experience that the Board requires, as well as the conditions that candidates should display to fill the vacancies arising.
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The Committee will ensure that the selection procedures are not marred by implicit biases that may hinder the selection of female directors to fill vacancies, while trying to ensure that women who possess the professional profile sought are included on the shortlists when there are no or few current female directors.
When drafting proposals for the appointment and re-election of directors, the Committee will consider applications for potential candidates submitted by current Board members when appropriate.
Review the status of each director each year, so that this may be reflected in the annual report on corporate governance.
Report on the performance of the Chairman of the Board and, where applicable, the Company’s CEO, such that the Board can make its periodic assessment, under the terms established in the Board regulations.
Should the chairmanship of the Board or the post of CEO fall vacant, the Committee will examine or organize, in the manner it deems suitable, the succession of the Chairman and/or CEO and make corresponding proposals to the Board for an orderly, well-planned succession.
Report any appointment and separation of senior managers.
Any others that may have been allocated under the Board regulations or attributed to the Committee by a Board of Directors resolution.
In the performance of its duties, the Appointments Committee will consult with the Chairman of the Board and, where applicable, the CEO via the committee chair, especially with respect to matters related to executive directors and senior managers.
In accordance with our Board regulations, the Committee may ask members of the BBVA Group to attend its meetings, when their responsibilities relate to its duties. It may also receive any advisory services it requires to inform its criteria on issues falling within the scope of its powers.
The chair of the Appointments Committee will convene it as often as necessary to comply with its functions although an annual meeting schedule will be drawn up in accordance with its duties. During 2011, the Appointments Committee met 10 times.
Compensation Committee
The Compensation Committee’s essential function is to assist the Board on matters regarding the remuneration policy for directors and senior management. It seeks to ensure that the remuneration policy established by the Company is duly observed.
The Committee will comprise a minimum of three members who will be external directors appointed by the Board, which will also appoint its chair. The chair and the majority of its members must be independent directors, in compliance with the Board regulations.
Mr. Juan Pi Llorens
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The scope of the functions of the Compensation Committee is as follows:
Propose the remuneration system for the Board of Directors as a whole, in accordance with the principles established in the Company bylaws, their amounts and method of payment.
Determine the extent and amount of the remuneration, entitlements and other economic rewards for the Chairman and CEO, the President and COO and, where applicable, other executive directors of the Bank, so that these can be reflected in their contracts. The Committee’s proposals on such matters will be submitted to the Board of Directors.
Issue a report on the directors’ remuneration policy each year. This will be submitted to the Board of Directors, which will apprise the Company’s annual shareholders’ general meeting of this.
Propose the remuneration policy for senior management to the Board, and the basic terms and conditions to be contained in their contracts, directly supervising the remuneration of the senior managers responsible for risk management and with compliance functions within the Bank.
Propose the remuneration policy to the Board for employees whose professional activities may have a significant impact on the Bank’s risk profile.
Oversee observance of the remuneration policy established by the Company and periodically review the remuneration policy applied to executive directors, senior management and employees whose professional activities may have a significant impact on the Bank’s risk profile.
In the performance of its duties, the Compensation Committee will consult with the Chairman of the Board and, where applicable, the Company’s CEO via the Committee chair, especially with respect to matters related to executive directors and senior managers.
Pursuant to our Board regulations, the Committee may ask members of the BBVA Group to attend its meetings, when their responsibilities relate to its duties. It may also receive any advisory services it requires to inform its criteria on matters falling within the scope of its powers.
The chair of the Compensation Committee will convene it as often as necessary to comply with its functions although an annual meeting schedule will be drawn up in accordance with its duties. During 2011, the Compensation Committee met 9 times.
Risk Committee
The Board’s Risk Committee is tasked with the analysis of issues related to our risk management and control policy and strategy. It assesses and approves any risk transactions that may be significant.
The Risk Committee shall have a majority of external directors, with a minimum of three members, appointed by the Board of Directors, which shall also appoint its chairman.
As of the date of this Annual Report, the members of the Risk Committee were:
Mr. José Luis Palao García-Suelto
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Under the Board regulations, it has the following duties:
Analyze and evaluate proposals related to our risk management and oversight policies and strategy. In particular, these shall identify:
the risk map;
the setting of the level of risk considered acceptable according to the risk profile (expected loss) and capital map (risk capital) broken down by our businesses and areas of activity;
the internal information and oversight systems used to oversee and manage risks; and
the measures established to mitigate the impact of risks identified should they materialize.
Monitor the match between risks accepted and the profile established.
Assess and approve, where applicable, any risks whose size could compromise our capital adequacy or recurrent earnings, or that present significant potential operational or reputational risks.
Check that we possess the means, systems, structures and resources benchmarked against best practices to allow implementation of its risk management strategy.
Pursuant to our Board regulations, the Committee may request the attendance at its sessions of persons with positions in the group that are related to the Committee’s functions. It may also obtain advice as necessary to establish criteria related to its functions.
The committee meets as often as necessary to best perform its duties, usually once a week. In 2011, it held 43 meetings.
D. Employees
As of December 31, 2011, we, through our various affiliates, had 110,645 employees. Approximately 84% 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
Russia
Ireland
Luxembourg
Turkey
Total Europe
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Panama
Puerto Rico
Argentina
Brazil
Colombia
Venezuela
Uruguay
Paraguay
Bolivia
Chile
Cuba
Peru
Ecuador
Total Latin America
Hong Kong
Japan
China
Singapore
India
South Korea
Total Asia
Australia
Total Oceania
As of December 31, 2010, we, through our various affiliates, had 106,976 employees. Approximately 83% 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.
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As of December 31, 2009, we, through our various affiliates, had 103,721 employees. Approximately 82% 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.
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The terms and basic conditions of employment in private sector banks in Spain are negotiated with trade unions representing sector 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. The collective bargaining agreement in application during 2009 and 2010 came into effect as of January 1, 2007 and ended on December 31, 2010. On March 14, 2012, the XXII collective bargain agreement was signed. This agreement became effective on January 1, 2011 and will remain in effect until December 31, 2014.
As of December 31, 2011, 2010 and 2009, we had 1,689, 1,060 and 350 temporary employees in our Spanish offices, respectively.
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E. Share Ownership
As of April 24 2012, the members of the Board of Directors owned an aggregate of BBVA shares as shown in the table below:
Gonzalez Rodríguez, Francisco
Cano Fernández, Ángel
Alfaro Drake, Tomás
Álvarez Mezquíriz, Juan Carlos
Bustamante y de la Mora, Ramon
Fernandez Rivero, José Antonio
Ferrero Jordi, Ignacio
Garijo López, Belén
Loring Martínez de Irujo, Carlos
Maldonado Ramos, José
Medina Fernández, Enrique
Palao García-Suelto, José Luis
Pi Llorens, Juan
Rodriguez Vidarte, Susana
BBVA has not granted options on its shares to any members of its administrative, supervisory or management bodies. Information regarding the variable share-based remuneration system for BBVA’s executive team, including the executive directors and the Multi-year variable share-based remuneration program for 2010-2011, is provided under “Item 6. Directors, Senior Management and Employees—Compensation.”
As of April 24, 2012, the Management Committee (excluding executive directors) and their families owned 1,931,765 shares. None of the members of our Management Committee held 1% or more of BBVA’s shares as of such date.
As of April 24, 2012, a total of 26,143 employees (excluding the members of the Management Committee and executive directors) owned 55,426,664 shares, which represents 1.09% of our capital stock.
A. Major Shareholders
As of April 13, 2012, Manuel Jove Capellán, beneficially owned 5.07% of our shares. There have not been significant changes in his percentage ownership in the past 3 years. To our knowledge, no other person, corporation or government beneficially owned, 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 April 13, 2012, there were 999,811 registered holders of BBVA’s shares, with an aggregate of 5,061,082,378 shares, of which 227 shareholders with registered addresses in the United States held a total of 1,016,624,380 shares (including shares represented by American Depositary Receipts (“ADRs”)). Since certain of such shares and ADRs are held by nominees, the foregoing figures are not representative of the number of beneficial holders. Our directors and executive officers did not own any ADRs as of April 13, 2012. See “Item 6. Directors, Senior Management and Employees—Share Ownership”
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B. Related Party Transactions
Loans to Directors, Executive Officers and Other Related Parties
As of December 31, 2011, there was no amount disposed of the loans granted by the Group’s credit institutions to the members of the Bank’s Board of Directors and, at that date, the loans granted by the Group’s credit institutions to the members of the Management Committee (excluding the executive directors) amounted to €6,540 thousand.
The loans granted by the Group’s credit institutions as of December 31, 2010 and 2009 to the members of the Board of Directors of the Bank amounted to €531 and €806 thousand, respectively, and the loans granted by the Group’s credit institutions to members of the Management Committee (excluding the executive directors), amounted to €4,924 and €3,912 thousand as of December 31, 2010 and 2009, respectively.
The amount disposed of the loans granted as of December 31, 2011, 2010 and 2009 to parties related to the members of the Bank’s Board of Directors and Management Committee amounted to €20,593, €28,493 and€51,882 thousand, respectively.
As of December 31, 2011, no guarantees were granted to any member of the Board of Directors, and the amount of guarantees granted to members of the Bank’s Management Committee reached €9 thousand. As of December 31, 2010 and 2009, no guarantees, financial leases or commercial loans were granted to members of the Board of Directors or the Management Committee.
As of December 31, 2011, 2010 and 2009, guarantees, financial leases and commercial loan transactions arranged with parties related to the members of the Bank’s Board of Directors and its Management Committee reached €10,825, €4,424 and €24,514 thousand, respectively.
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 collectability 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:
overnight call deposits;
foreign exchange purchases and sales;
derivative transactions, such as forward purchases and sales;
money market fund transfers;
letters of credit for imports and exports;
and other similar transactions within the scope of the ordinary course of the banking business, such as loans and other banking services to our 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:
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 collectability or present other unfavorable features.
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C. Interests of Experts and Counsel
A. Consolidated Statements and Other Financial Information
Financial Information
See Item 18.
The table below sets forth the amount of interim, final and total cash dividends paid by BBVA on its shares for the years 2007 to 2011. The rate used to convert euro amounts to dollars was the noon buying rate at the end of each year.
On March 13, 2009, our shareholders approved the distribution of additional shareholder remuneration to complement the 2008 cash dividend in the form of an in-kind distribution of a portion of the share premium reserve. On April 20, 2009, our shareholders received BBVA shares from treasury stock in the proportion of one share for every 62 shares outstanding. Accordingly, the number of shares distributed was 60,451,115. This payment entailed a charge against the share premium reserve of €317 million, the weighted average market price of BBVA shares in the continuous electronic market on the trading session on March 12, 2009, the day immediately preceding the date of the annual shareholders’ general meeting.
In execution of the 2011 “Dividendo Opción” described under “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Dividends”, on March 29, 2011, the Board of Directors executed the first free-of-charge capital increase approved by our shareholders in the general shareholders meeting of March 11, 2011 for the implementation of the 2011 “Dividendo Opción “ scheme. This free of charge capital increase gave BBVA shareholders the option to receive one (1) newly-issued share of the Bank for each 59 shares of BBVA held by them or to receive a cash remuneration of €0.149 per share. For more information, please see BBVA’s report on Form 6-K furnished to the United States Securities Exchange Commission on March 29, 2011 (SEC Accession No. 0001309014-11-000177).
In execution of the 2011 “Dividendo Opción” described under “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Dividends”, on September 27, 2011, the Board of Directors executed the second free-of-charge capital increase approved by our shareholders in the general shareholders meeting of March 11, 2011 for the implementation of the 2011 “Dividendo Opción “ scheme. This free of charge capital increase gave BBVA shareholders the option to receive one (1) newly-issued share of the Bank for each 56 shares of BBVA held by them or to receive a cash remuneration of €0.10 per share. For more information, please see BBVA’s report on Form 6-K furnished to the United States Securities Exchange Commission on September 27, 2011 (SEC Accession No. 0001309014-11-000624).
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In execution of the 2012 “Dividendo Opción” described under “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Dividends”, on April 11, 2012, the Executive Committee of the Board of Directors executed the first free-of-charge capital increase approved by our shareholders in the general shareholders meeting of March 16, 2012 for the implementation of the 2012 “Dividendo Opción” scheme. This free of charge capital increase gives BBVA shareholders the option to receive one (1) newly-issued share of the Bank for each 47 shares of BBVA held by them or to receive a cash remuneration of €0.118 per share. For more information, please see BBVA’s reports on Form 6-K furnished to the United States Securities Exchange Commission on March 28, 2012 and April 11, 2012 (SEC Accession Nos. 0001309014-12-000237 and 0001309014-12-000277 respectively).
We have paid annual dividends to our shareholders since the date we were founded. Historically, we have paid interim dividends each year. The total dividend (cash and scrip) 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 in cash or scrip after the approval of our financial statements by the shareholders at the annual shareholders’ general 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 we expect to declare and pay dividends (in cash or scrip) on our shares on a quarterly basis in the future, the payment of dividends will depend upon our earnings, financial condition, governmental regulations and policies and other factors.
As described under “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Dividends”, the annual shareholders’ general meeting held on March 16, 2012 passed a resolution adopting a new scrip dividend scheme called “Dividendo Opción” on similar terms as the 2011 “Dividendo Opción” scheme. Accordingly, the “Dividendo Opción” is implemented as an alternative remuneration scheme for BBVA shareholders with the aim to provide BBVA shareholders with a flexible option to receive newly issued shares of the Bank, without thereby altering BBVA’s cash remuneration policy.
Subject to the terms of the deposit agreement entered into with the Bank of New York Mellon, holders of ADSs are entitled to receive dividends (in cash or scrip) 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—Business Overview—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—Business Overview—Supervision and Regulation—Capital 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, 2011, BBVA had approximately €11 billion of reserves in excess of applicable capital and reserve requirements, which were not restricted as to the payment of dividends.
Legal Proceedings
The Group is party to certain legal actions in a number of jurisdictions, including, among others, Spain, Mexico and the United States, arising in the ordinary course of business. BBVA considers that none of such actions is material, individually or in the aggregate, and none of such actions is expected
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to result in a material adverse effect on the Group’s financial position, results of operations or liquidity, either individually or in the aggregate. Management believes that adequate provisions have been made in respect of the actions arising in the ordinary course of business. BBVA has not disclosed to the markets any contingent liability that could arise from such actions as it does not consider them material.
B. Significant Changes
No significant change has occurred since the date of the Consolidated Financial Statements other than those mentioned in our Consolidated Financial Statements.
A. Offer and Listing Details
BBVA’s shares are listed on the Spanish stock exchanges in Madrid, Bilbao, Barcelona and Valencia (the “Spanish Stock Exchanges”) and listed on the computerized trading system of the Spanish Stock Exchanges (the “Automated Quotation System”). BBVA’s shares are also listed on the Mexican and London stock exchanges as well as quoted on SEAQ International in London. BBVA’s shares are listed on the New York Stock Exchange as American Depositary Shares (ADSs).
ADSs are listed on the New York Stock Exchange and are also traded on the Lima (Peru) Stock Exchange, by virtue of an exchange agreement entered into between these two exchanges. Each ADS represents the right to receive 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 ADRs on conversion by The Bank of New York Mellon (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 BBVA on the Automated Quotation System.
Fiscal year ended December 31, 2007
Annual
Fiscal year ended December 31, 2008
Fiscal year ended December 31, 2009
Fiscal year ended December 31, 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
141
Euro per Share
Fiscal year ended December 31, 2011
Month ended October 31, 2011
Month ended November 30, 2011
Month ended December 31, 2011
Month ended January 31, 2012
Month ended February 29, 2012
Month ended March 31, 2012
Month ended April 30, 2012 (through April 20)
From January 1, 2011 through December 31, 2011 the percentage of outstanding shares held by BBVA and its affiliates ranged between 0.649% and 1.855%, calculated on a daily basis. As of April 4, 2012, the percentage of outstanding shares held by BBVA and its affiliates was 1.140%.
The table below sets forth the reported high and low sales closing prices for the ADSs of BBVA on the New York Stock Exchange for the periods indicated.
U.S. Dollars per ADS
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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 2011, 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 (Sistema de Interconexión Bursátil) 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. We are currently a member of the four Spanish Stock Exchanges and can trade through the Automated Quotation System.
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 regime concerning opening prices was changed by an internal rule issued by the Sociedad de Bolsas. In this new regime all references to maximum changes in share prices are substituted by static and dynamic price ranges for each listed share, calculated on the basis of the most recent historical volatility of each share, and made publicly available and updated on a regular 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 levels. If, during the open session, the quoted price of a share exceeds these static or dynamic price ranges, Volatility Auctions are triggered, resulting in new static or dynamic price ranges being set for the share object of the same. 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.
Trading hours for block trades (i.e. operations involving a large number of shares) are also from 9:00 a.m. to 5:30 p.m.
Between 5:30 p.m. and 8:00 p.m., special operations, whether Authorized or Communicated, can take place outside the computerized matching system of the Sociedad de Bolsas if they fulfill certain requirements. In such respect Communicated special operations (those that do not need the prior authorization of the Sociedad de Bolsas) can be traded if all of the following requirements are met: (i) the trade price of the share must be 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; (ii) the market member executing the trade must have previously covered certain positions in securities and cash before executing the trade; and (iii) the size of the trade must involve at least €300,000 and represent at least a 20% of the average daily trading volume of the shares in the Automated Quotation System during the preceding three months. If any of the aforementioned requirements is not met, a special operation may still take place, but it will need to take the form ofAuthorized special operation (i.e. those needing the prior authorization of the Sociedad de Bolsas). Such authorization will only be upheld if any of the following requirements is met:
the trade involves more than €1.5 million and more than 40% of the average daily volume of the stock during the preceding three months;
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the transaction derives from a merger or spin-off process or from the reorganization of a group of companies;
the transaction is executed for the purposes of settling a litigation or completing a complex group of contracts; or
the Sociedad de Bolsas finds other justifiable cause.
Please note that the regime set forth in the previous two paragraphs may be subject to change, as article 36 of the Securities Market Act, defining trades in Spanish Exchanges was, as described below, modified as a result Law 47/2007. The Spanish Stock Markets are currently reviewing their trading rules in light of this new regulation.
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.
Sociedad de Bolsas is also the manager of the IBEX 35® Index. This index is made up by the 35 most liquid securities traded on the Spanish Market and, technically, it is a price index that is weighted by capitalization and adjusted according to the free float of each company comprised in the index. Apart from its quotation on the four Spanish Exchanges, BBVA is also currently included in the IBEX 35® Index.
Clearing and Settlement System.
On April 1, 2003, by virtue of Law 44/2002 and of Order ECO 689/2003 of March 27, 2003 approved by the Spanish Ministry of Economy, the integration of the two main existing book-entry settlement systems existing in Spain at the time—the equity settlement system Servicio de Compensación y Liquidación de Valores (“SCLV”) and the Public Debt settlement system Central de Anotaciones de Deuda del Estado(“CADE”)—took place. As a result of this integration, a single entity, known as Sociedad de Gestión de los Sistemas de Registro Compensación y Liquidación de Valores(“Iberclear”) assumed the functions formerly performed by SCLV and CADE according to the legal regime stated in article 44 bis of the Spanish Securities Market Act.
Notwithstanding the above, rules concerning the book-entry settlement systems enacted before this date by SCLV and the Bank of Spain, as former manager of CADE, continue in force, but any reference to the SCLV or CADE must be substituted by Iberclear.
In addition, and according to Law 41/1999, Iberclear manages three securities settlement systems for securities in book-entry form: The system for securities listed on the four Spanish Stock Exchanges, the system for Public Debt and the system for debt securities traded in AIAF Mercado de Renta Fija. Cash settlement, from February 18, 2008 for all systems is managed through the TARGET2-Banco de España payment system.
The following four paragraphs exclusively address issues relating to the securities settlement system managed by Iberclear for securities listed on the Spanish Stock Exchanges (the “SCLV system”).
Under Law 41/1999 and Royal Decree 116/1992, transactions carried out on the Spanish Stock Exchanges are cleared and settled through Iberclear and its participants (each an “entidad participante”), through the SCLV system. Only Iberclear participants to this SCLV system are entitled to use it, with participation restricted to authorized members of the Spanish Stock Exchanges (for whom
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participation was compulsory until March 2007), 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 clearing and settlement systems. BBVA is currently a participant in Iberclear. Iberclear and its participants are responsible for maintaining records of purchases and sales under the book-entry system. In order to be listed, shares of Spanish companies must be held in book-entry form. Iberclear, maintains a “two-step” book-entry registry reflecting the number of shares held by each of its participants as well as the amount of such shares held on behalf of beneficial owners. Each participant, in turn, maintains a registry of the owners of such shares. Spanish law considers the legal owner of the shares to be:
the participant appearing in the records of Iberclear as holding the relevant shares in its own name, or
the investor appearing in the records of the participant as holding the shares.
Iberclear settles Stock Exchange trades in the SCLV system in the so-called “D+3 Settlement” by which the settlement of Stock Exchange trades takes place three business days after the date on which the transaction was carried out in the Stock Exchange.
Ministerial Order EHA/2054/2010, amended Iberclear’s Regulation permitting Iberclear to clear and settle trades of equity securities listed in the Spanish Stock Exchanges that are entered into outside such stock exchanges (whether over-the-counter or in multilateral trading facilities).
Obtaining legal title to shares of a company listed on a Spanish Stock Exchange requires the participation of a Spanish broker-dealer, bank or other entity authorized under Spanish law to record the transfer of shares in book-entry form in its capacity as Iberclear participant for the SCLV system. To evidence title to shares, at the owner’s request the relevant participant entity must issue a certificate of ownership. In the event the owner is a participant entity, Iberclear is in charge of the issuance of the certificate with respect to the shares held in the participant entity’s own name.
According to article 42 of the Securities Market Act 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 ADSs, and upon any later sale of such shares by such holder. Transfers of ADSs do not require the participation of a member of a Spanish Stock Exchange. 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:
established an independent regulatory authority, the CNMV, to supervise the securities markets;
established a framework for the regulation of trading practices, tender offers and insider trading;
required stock exchange members to be corporate entities;
required companies listed on a Spanish Stock Exchange to file annual audited financial statements and to make public quarterly financial information;
established the legal framework for the Automated Quotation System;
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exempted the sale of securities from transfer and value added taxes;
deregulated brokerage commissions; and
provided for transfer of shares by book-entry or by delivery of evidence of title.
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 April 12, 2007, the Spanish Congress approved Law 6/2007, which amends the Securities Markets Act in order to adapt it to Directive 2004/25/EC on takeover bids, and Directive 2004/109/EC on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market (amending Directive 2001/34/EC). Regarding the transparency of listed companies, Law 6/2007 has amended the reporting requirements and the disclosure regime, and has established changes in the supervision system. On the takeover bids side, Law 6/2007 has established the cases in which a company must launch a takeover bid and the ownership thresholds at which a takeover bid must be launched. It also regulates conduct rules for the board of directors of target companies and the squeeze-out and sell-out when a 90% of the share capital is held after a takeover bid. Additionally, Law 6/2007 has been further developed by Royal Decree 1362/2007, on transparency requirements for issuers of listed securities.
On December 19, 2007, the Spanish Congress approved Law 47/2007, which 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. Further MiFID implementation has been introduced by Royal Decree 217/2008 and Ministerial Order EHA/1665/2010, which developed articles 71 and 76 of such Royal Decree 217/2008 regarding fees and types of agreements.
On October 4, 2011, the Spanish Congress approved Law 32/2011, which amends the Securities Markets Act by enhancing the clearing, settlement and book-entry system (by establishing central counterparty equity clearing).
Trading by the Bank and its Affiliates in the Shares
Trading by subsidiaries in their parent companies shares is restricted by the Corporate Enterprises 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 and the authorization term, which cannot exceed five years. 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 ten percent of BBVA’s total capital, as per the new treasury stock limits set forth in Law 3/2009 of structural modifications of commercial companies. 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
Royal Decree 1362/2007 requires that any entity which acquires or transfers shares and as a consequence the number of voting rights held exceeds, reaches or is below the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% y 90% of the capital stock of a company listed on a Spanish Stock Exchange must, within four days after that acquisition or transfer, report it to such company, and to the CNMV. This duty to report the holding of a significant stake will be applicable not only to the acquisitions and transfers in the terms described above, but also to those cases in which in the absence of an acquisition or transfer of shares, the ratio of an individual’s voting rights exceeds, reaches or is below the thresholds that trigger the duty to report, as a consequence of an alteration in the total number of voting rights of an issuer.
In addition, any company listed on a Spanish Stock Exchange must report on a non-public basis to the CNMV, within 4 Stock Exchange business days, 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 the ratio of voting rights held at the time of their appointment as members of the board, when they are ceased as members, as well as 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 who 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—Exchange Controls—Restrictions on Acquisitions of Shares”.
Royal Decree 1362/2007 also establishes 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 three percent is reduced to one percent.
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.
In addition, BBVA shares were included, among others, in Annex 1 of the Agreement of the Executive Committee of the CNMV on naked short selling dated September 22, 2008, which was supplemented by a further agreement of this body dated May 27, 2010. According to such committee’s agreements, from June 11, 2010, the following reporting and disclosing thresholds are in place for short positions in shares listed in Spanish regulated markets (including BBVA shares): (i) Any natural or legal person holding short positions in shares listed in Spanish regulated markets has to disclose to the CNMV: any short position exceeding 0.20% in the share capital of the issuers of such shares, any increase or decrease of any short position from this 0.20% threshold, as well as any change in a short position (whether downwards or upwards) of at least 0.1% of such shares; (ii) the CNMV will make public through its website the following information, provided such information has been disclosed to the CNMV: the short positions which exceed 0.5% in shares listed in the Spanish regulated markets, the increase or decrease in short positions in such shares that range further from this threshold (such as 0.5%, 0.6% and 0.7%); and the aggregate of any short positions in such shares falling under the 0.2% and 0.5% thresholds.
Ministerial Order EHA/1421/2009, implements Article 82 of Securities Market (Law 24/1988 of July 28, 1988) on the publication of significant information. The Ministerial Order specifies certain aspects relating to notice of significant information that were pending implementation in Law 24/1988.
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In this respect, the principles to be followed and conditions to be met by entities when they publish and report significant information are set forth, along with the content requirements, including when significant information is connected with accounting, financial or operational projections, forecasts or estimates. The reporting entity must designate at least one interlocutor whom the CNMV may consult or from whom it may request information relating to dissemination of the significant information. Lastly, some of the circumstances in which it is considered that an entity is failing to comply with the duty to publish and report significant information are described. These include, among others, cases in which significant information is disseminated at meetings with investors or shareholders or at presentations to analysts or to media professionals, but is not communicated, at the same time, to the CNMV.
Circular 4/2009 of the CNMV further develops Ministerial Order EHA1421/2009. In this respect, the Circular sets forth a precise proceeding for the actual report of the significant information and draws up an illustrative list of the events that may be deemed to constitute significant information. This list includes, among others, events connected with strategic agreements and mergers and acquisitions, information relating to the reporting entity’s financial statements or those of its consolidated group, information on notices of call and official matters and information on significant changes in factors connected with the activities of the reporting entity and its group.
Tax Requirements
According to Law 19/2003 and its associated regulations, an issuer’s parent company (credit entity or listed company) is required, on an annual basis, to provide the Spanish tax authorities with the following: (i) disclosure of information regarding those investors with Spanish Tax residency obtaining income from securities and (ii) the amount of income obtained by them in each period.
B. Plan of distribution
C. Markets
D. Selling Shareholders
E. Dilution
F. Expenses of the Issue
A. Share Capital
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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.
The annual general shareholders’ meeting held on March 16, 2012, resolved to amend the following articles of our bylaws: (i) article 20 (Notice of meeting); (ii) article 21 (Form and content of the notice of meeting); (iii) article 29 (Shareholders’ right to information); (iv) article 31 (Adoption of resolutions); (v) article 40 (Board meetings and notice of meetings); and (vi) article 41 (Quorum and adoption of resolutions), to adapt them to the Corporate Enterprises Act, as amended by Law 25/2011, of August 1, which incorporated Directive 2007/36/EC, of July 11, on the exercise of certain rights of shareholders in listed companies.
As mentioned in “Item 6. Directors, Senior Management and Employees—Compensation” the annual general shareholders’ meeting also resolved to amend article 53 of our bylaws on the allocation of profit or losses and the inclusion of a new article 33 bis regarding the compensation of non-executive directors.
As of the date of this Annual Report these amendments are pending registration with the Commercial Registry. In addition, pursuant to article 8.1 of Royal Decree 1245/1995, of July 14, on the creation of banks, cross-border activity and other matters relating to the legal regime of financial institutions, the bylaw amendments approved in the shareholders’ general meeting held on March 16, 2012 are conditional on obtaining the authorization from the relevant authorities.
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, Company section folio 1, sheet BI-17-1, 1st entry. 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 regarding directors are contained in our bylaws. Also, our Board regulations govern the internal procedures and the operation of the Board and its committees and directors’ rights and duties as described in their charter. The referred Board regulations (i) limit a director’s right to vote on a proposal, arrangement or contract in which the director is materially interested; (ii) limit the power or directors to vote on compensation for themselves; (iii) limit borrowing powers exercisable by the directors and how such borrowing powers can be amended; or (iv) require retirement of directors at a certain age. In addition, the Board regulations contain a series of ethical standards. See “Item 6. Directors, Senior Management and Employees”.
Certain Provisions Regarding Privileged Shares
The bylaws authorize us to issue ordinary, non-voting, redeemable and privileged shares. As of the date of the filing of this Annual Report, we have no non-voting, redeemable or privileged shares outstanding.
The Company may issue shares that confer some privilege over ordinary shares under the legally established terms and conditions, complying with the formalities prescribed for amending our bylaws.
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Only shares that have been issued as redeemable may be redeemed by us. 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, our capital is comprised of one class of ordinary shares, all of which have the same rights.
Once the perquisites established by law or in our bylaws have been covered, dividends may be paid out to shareholders and charged to the year’s profit or to unrestricted reserves, in proportion to the capital they may have paid up, provided the value of the total net assets is not, or as a result of such distribution would not be, less than the share 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 voting share will confer the right to one vote on the holder present or represented at the general meeting. 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.
The bylaws do not contain any provisions relating to sinking funds or potential liability of shareholders to further capital calls by us.
The bylaws do not establish that special 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
The annual shareholders’ general meeting has its own set of regulations on issues such as how it operates and what rights shareholders enjoy regarding annual general shareholders’ meeting. These establish the possibility of exercising or delegating votes over remote communication media.
General shareholders’ meetings may be annual or extraordinary. Annual general shareholders’ meetings are held within the first six months of each financial year in order to review, among other
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things, the management of the company, and to approve, if applicable, annual financial statements for the previous fiscal year. Extraordinary general shareholders’ 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 shareholders’ meetings must be convened by the Board of Directors, whether by their own decision or upon the request of shareholders holding at least five percent of our share capital.
The annual general shareholders’ meeting held on March 16, 2012, resolved to amend article 5 of our shareholders’ general meeting regulations which establishes that annual and extraordinary shareholders’ general meetings must be called within the notice period required by law. This will be done by means of an announcement published by the Board of Directors or its proxy in the Official Gazette of the Companies Registry (“BORME”) or one of the daily newspapers in Spain with the highest-readership, within the notice period required by law, as well as being disseminated on the CNMV website and the Company website, except when legal provisions establish other media for disseminating the notice.
The annual shareholders’ general meeting also resolved to amend the following articles of our shareholders’ general meeting regulations: (i) article 6 (Shareholders’ right to information prior to the General Meeting); (ii) article 8 (Voting and proxies over remote communication media); (iii) article 9 (Proxies for the General Meeting); (iv) article 10 (Public call for proxy); (v) article 18 (Organization of General Meetings); (vi) article 19 (Voting the resolution proposals) and (vii) article 23 (Publicizing the resolutions); and the inclusion of a new article 5 bis (Supplement to the notice of meeting and new draft resolution proposals), in order to adapt them to the Corporate Enterprises Act, as amended by Law 25/2011, of August 1, which incorporated Directive 2007/36/EC, of July 11, on the exercise of certain rights of shareholders in listed companies, and the Company bylaws.
The Company’s shareholders’ general meetings may be attended by anyone owning the minimum number of shares established in our bylaws(500), provided that their holding is registered in the corresponding accounting records five days before the general meeting is scheduled and that they conserve at least this same number of shares until the time when the general meeting is held. Holders of fewer shares may group together until achieving the required number, appointing a representative.
General shareholders’ meetings will be validly constituted on first call with the presence of at least 25% of our voting capital, either in person or by proxy. No minimum quorum is required to hold a general shareholders’ meeting on second call. In either case, resolutions will be agreed by the majority of the votes. However, a general shareholders’ meeting will only be validly held with the presence of 50% of our voting capital on first call or of 25% of the voting capital on second call, in the case of resolutions concerning the following matters:
issuances of debt;
capital increases or decreases;
the elimination on or limitation of the pre-emptive subscription rights over new shares;
transformation, merger of BBVA or break-up of the company and global assignment of assets and liabilities;
the off-shoring of domicile, and
any other amendment to the bylaws.
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.
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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% 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
The 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 be notified to the Ministry of Economy and Treasury prior to its execution. All other investments in our 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, see “—Exchange Controls”, foreign investors may freely transfer out of Spain any amounts of invested capital, capital gains and dividends.
C. Material Contracts
Acquisition of shareholding in Garanti
On November 1, 2010, we entered into share purchase agreements with GE Araştirma ve Müşavirlik Limited Şirketi and General Electric Capital Corporation and Doğuş Holding A.Ş. (“Doğuş”), respectively, pursuant to which, on March 22, 2011, we acquired Garanti shares representing 18.60% and 6.29%, respectively, of the total issued share capital of Garanti at a price of approximately $3,776 million (equivalent to approximately TL 6.92 per lot of 100 Garanti shares, based on an exchange rate of TL 1.4327=$1.00) and $2,062 million (equivalent to approximately TL 11.18 per lot of 100 Garanti shares, based on such exchange rate), respectively, for a total purchase price of $5,838 million (the “SPAs”). The acquisitions contemplated in the SPAs were completed simultaneously and were conditional upon each other’s completion. In addition, the SPAs were subject to customary conditions precedent relating to the obtaining of regulatory consents to the sale.
In addition, on November 1, 2010, we entered into a shareholders’ agreement with Doğuş which is in effect since March 2011 (the “SHA”). Doğuş is one of the largest Turkish conglomerates and has business interests in the financial services, construction, tourism and automotive sectors. Pursuant to the SHA, BBVA and Doğuş have agreed to manage Garanti through the appointment of board members and senior management. The SHA provides for two phases (“Phase 1” and “Phase 2”, respectively), with the rights between the two shareholders differing based on the respective phase. In addition, during the Phase 2 period, BBVA’s rights will depend on the level of Doğuş’ shareholding. The Phase 1 period commenced in March 2011 and will end upon the occurrence of certain trigger events which relate to changes in BBVA’s and Doğuş’ shareholding in Garanti. If further new shares are acquired by either BBVA or Doğuş during Phase 1, the other party will have the right to acquire 50% of the shares so acquired and, if such party chooses not to acquire them, it will nevertheless have voting usufruct rights over 50% of the shares acquired. In addition, the shareholders’ agreement provides for rights of first offer, tag-along rights and a lock-up period in respect of Garanti shares owned by BBVA and Doğuş which will end on the earlier of (i) the end of the Phase 1 period, or (ii) March 22, 2014. Moreover, the parties will seek to maintain Garanti’s listing on the Istanbul Exchange and to distribute
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at least 25% of Garanti’s distributable profits as long as they hold a certain stake in Garanti. BBVA also has a perpetual option to purchase an additional 1% of Garanti, which will become exercisable on March 22, 2016.
A copy of each of the SPAs and the SHA has been filed as an exhibit to this Annual Report.
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 and Royal Decree 664/1999, 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 1080/1991.
On July 5, 2003, Law 19/2003 came into effect. This law is an update to other Spanish exchange control and money laundering prevention laws.
Restrictions on Acquisitions of Shares
The Discipline and Intervention of Credit Institutions Act (Law 26/1988), amended by Law 5/2009, of June 29, provides that any individual or corporation, acting alone or in concert with others, intending to directly or indirectly acquire a significant holding in a Spanish financial institution (as defined in article 56 of the aforementioned Law 26/1998) or to directly or indirectly increase its holding in one in such a way that either the percentage of voting rights or of capital owned were equal to or more than 20%, 30% or 50%, or by virtue of the acquisition, might take control over the financial institution, must first notify the Bank of Spain. The Bank of Spain will have 60 working days after the date on which the notification was received, to evaluate the transaction and, where applicable, challenge the proposed acquisition on the grounds established by law.
A significant participation is considered 10% of the outstanding share capital of a bank or a lower percentage if such holding allows for the exercise of a significant influence.
Any acquisition without such prior notification, or before the period established in article 58.2 has elapsed or against the objection of the Bank of Spain, will produce the following results:
the acquired shares will have no voting rights; and
if considered appropriate, the target bank may be taken over or its directors replaced and a sanction imposed.
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The Bank of Spain has 60 working days after the date on which the notification was received 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.
Regarding the transparency of listed companies, Law 6/2007 amended the Securities Markets Act on takeover bids and transparency requirements for issuers. 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, specifically information on significant stakes, 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.
Tender Offers
The Spanish legal regime concerning takeover bids was amended by Law 6/2007 in order to adapt the Spanish Securities Market Act to the Directive 2004/25/EC on takeover bids, and Directive 2004/109/EC on the harmonization of transparency requirements in relation to information about issuers.
Additionally, Royal Decree 1066/2007, of July 29, on takeover bids, completes the modifications introduced by Law 6/2007, further developing the takeover bids legal framework in Spain and harmonizing the Spanish legislation with Directive 2004/25/EC.
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 as of the date of the filing of this Annual Report. 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, and are not 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 for U.S. federal income tax purposes:
a citizen or an individual resident of the United States,
a corporation or other entity treated as a corporation, created or organized under the laws of the United States or any political subdivision thereof, or
an estate or trust the income of which is subject to United States federal income tax without regard to its source.
(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
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(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 should 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, cash 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 21% 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 a withholding tax rate of 21%), transferring the resulting net amount to the depositary.
However, under the Treaty, if you are a U.S. Resident, you are entitled to a reduced withholding tax rate of 15%. To benefit from the Treaty-reduced rate of 15%, if you are a U.S. Resident, you must provide to BBVA through our paying agent depositary, before the tenth day following the end of the month in which the dividends were payable, a certificate from the U.S. Internal Revenue Service (“IRS”) stating that, to the best knowledge of the IRS, you are a resident of the United States within the meaning of the Treaty and entitled to its benefits.
If the paying agent depositary provides timely evidence (i.e., by means of the IRS certificate) of your right to apply the Treaty-reduced rate it will immediately receive the surplus amount withheld, which will be credited to you. The IRS certificate is valid for a period of one year from issuance.
To help shareholders obtain such certificates, BBVA has set up an online procedure to make this as easy as possible.
If the certificate referred to in the above paragraph is not provided to us through our paying agent depositary within said term, you may afterwards obtain a refund of the amount withheld in excess of the rate provided for in the Treaty.
As described under “Item 4. Information on the Company Business—Overview—Supervision and Regulation—Dividends”, the BBVA annual shareholders’ general meeting held on March 16, 2012, passed a resolution adopting two different free-of-charge capital increases for the implementation of a new “Dividendo Opción” scheme for this year, the first of which relates to the dividend traditionally paid in April and which execution we expect to complete in early May 2012. This dividend scheme lets the shareholders choose how they would like to receive their dividends: in cash or in new shares.
Pursuant to the terms of the “Dividendo Opción” program, upon its implementation, the shareholders will receive one free-of-charge allocation right for each share of BBVA that they hold as of a given record date. These rights will be tradable on the Spanish Stock Exchanges for a minimum period of 15 natural days. BBVA will undertake to purchase free allocation rights tendered by a shareholder to it during a certain period of time at a fixed price, subject to the conditions that may be imposed each time the “Dividendo Opción” program is implemented. This fixed price will be the result
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of dividing the Reference Price (as defined below) by the number of rights necessary to receive one new share plus one. At the end of the 15 natural days period, the free-of-charge allocation rights not validly tendered to BBVA will be converted into newly-issued shares of the Company. The number of rights necessary for the allocation of one new share and the total number of shares to be issued by BBVA will depend, amongst other factors, on the arithmetic mean of the weighted average prices of BBVA’s shares on the Spanish Stock Exchanges over the five trading sessions immediately prior to the Board’s resolution concerning the implementation of the relevant free-of-charge capital increase (the “Reference Price”).
Consequently, when each of the free-of-charge capital increases implementing the “Dividendo Opción” scheme is executed, the shareholders of BBVA will be able to freely choose among:
Not transferring their free-of charge allocation rights. In this case, at the end of the trading period, the shareholders will receive the number of new totally paid-up shares to which they are entitled. For tax purposes the delivery of paid-up shares does not constitute income for purposes of the Spanish Non-Resident Income Tax, whether or not non-residents act through a permanent establishment in Spain.
The acquisition value of both the new shares received and the shares from which they derive, will result from distributing the total cost among the number of securities (both existing and those issued as paid-up shares corresponding thereto). Such paid-up shares will be deemed to have been held for as long as the shares from which they derive.
Sell their free-of-charge allocation rights on the market. In this event, the amount obtained for the transfer of such rights on the market will be subject to the following tax treatment:
For purposes of the Spanish Non-Resident Income Tax on non-residents without a permanent establishment, the amount obtained for the transfer of the free-of-charge allocation rights on the market is subject to the same treatment that tax regulations provide for pre-emptive rights. Accordingly, the amount obtained for the transfer of the free-of-charge allocation rights decreases the acquisition value for tax purposes of the shares from which such rights derive, pursuant to Section 37.1.a) of Law 35/2006, of November 28, on Personal Income Tax (Ley del Impuesto sobre la Renta de las Personas Físicas).
Thus, if the amount obtained for the aforementioned transfer is larger than the acquisition value of the securities from which they derive, the difference will be deemed to be a capital gain earned by the transferor in the tax period in which the transfer is effected.
Use the purchase commitment assumed by BBVA of free-of-charge allocation rights. The tax treatment applicable to the amount received for the transfer to the Company of the free-of-charge allocation rights held by them in their capacity as shareholders or acquired on the market will be equal to the treatment applicable to dividends directly distributed in cash and, consequently, such amount will be subject to the corresponding withholding.
It should be borne in mind that this analysis does not cover all the possible tax consequences. Therefore, shareholders are advised to consult with their tax advisors.
Spanish Refund Procedure
According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004 dated July 30, 2004, as amended, a refund for the amount withheld in excess of the Treaty-reduced rate can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a U.S. Resident, you are required to file:
the corresponding Spanish tax form,
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the certificate referred to in the preceding section, and
evidence of the Spanish Non-Resident Income Tax that was withheld with respect to you.
The refund claim must be filed within four years from the date in which the withheld tax was collected by the Spanish tax authorities, but not before February 1, of the following year.
U.S. Residents are urged to consult their own tax advisors regarding refund procedures and any U.S. tax implications thereof.
Additionally, under the Spanish law, the first €1,500 of dividends received by individuals who are not resident in Spain for tax purposes, and do not operate through a permanent establishment in Spain, will be exempt from taxation in certain circumstances.
U.S. Holders should consult their tax advisors regarding the availability of, and the procedures to be followed in connection with, this exemption.
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 received 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, gain recognized 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 21% tax rate on capital gains recognized 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 discussion above, capital gains derived from the transfer of shares on 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 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 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, under 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 a certificate of residence in the United States from the IRS (discussed above in “—Taxation of Dividends”), together with the corresponding Spanish tax form.
Spanish Inheritance and Gift Taxes
Transfers of BBVA’s shares or ADSs upon death or by gift to individuals 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
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transferee. 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 for individuals, after applying all relevant factors, ranges between approximately 7.65% and 81.6%.
Corporations that are non-residents of Spain that receive BBVA’s shares or ADSs as a gift are subject to Spanish Non-Resident Income Tax at a 21% tax rate on the fair market value of such ordinary shares or ADSs as a capital gain tax. 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.
U.S. Tax Considerations
The following summary describes the material U.S. federal income tax consequences of the 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 hold the securities. The summary applies only to U.S. Holders (as defined under “Spanish Tax Considerations” above) that are eligible for the benefits of the Treaty and 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:
certain financial institutions;
dealers and traders who use a mark-to-market method of accounting;
persons holding ADSs or ordinary shares as part of a hedging transaction, straddle, wash sale, conversion transaction or integrated transaction or persons entering into a constructive sale with respect to the ADSs or ordinary shares;
persons whose “functional currency” for U.S. federal income tax purposes is not the U.S. dollar;
persons liable for the alternative minimum tax;
tax-exempt entities;
partnerships or other entities classified as partnerships for U.S. federal income tax purposes;
persons holding ADSs or ordinary shares in connection with a trade or business conducted outside of the United States;
persons who acquired our ADSs or ordinary shares pursuant to the exercise of any employee stock option or otherwise as compensation; or
persons who own or are deemed to own 10% or more of our voting shares.
The summary is based upon the tax laws of the United States including the Internal Revenue Code of 1986, as amended to the date hereof (the “Code”), the Treaty, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly with retroactive effect. In addition, the summary is based in part on representations by the depositary and assumes that each obligation
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provided for in or otherwise contemplated by BBVA’s deposit agreement and 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 advisors as to the U.S., Spanish or other tax consequences of the ownership and disposition of ADSs or ordinary shares in their particular circumstances, including the effect of any U.S. state or local tax laws.
In general, for United States federal income tax purposes, a U.S. Holder who owns ADSs will be treated as the owner 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 American depositary shares are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of American depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate 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 non-corporate U.S. Holders, could be affected by future actions that may be taken by such parties.
This discussion assumes that BBVA is not, and will not become, a passive foreign investment company (“PFIC”) (as discussed below).
Taxation of Distributions
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 ordinary shares or rights to subscribe for ordinary shares of its capital stock) will be includible in the income of a U.S. Holder as ordinary dividend income, to the extent paid out of BBVA’s current or accumulated earnings and profits as determined in accordance with U.S. federal income tax principles. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. The amount of such dividends will generally be treated as foreign source dividend income and will 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 certain non-corporate U.S. Holders in taxable years beginning before January 1, 2013 will be taxable at a maximum tax rate of 15%. U.S. Holders should consult their own tax advisors to determine the availability of this favorable rate in their particular circumstances.
The amount of dividend income will equal the U.S. dollar value of the euro received, calculated by reference to the exchange rate in effect on the date of receipt (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 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 the dividend is converted into U.S. dollars after the date of its receipt.
A scrip dividend (such as a dividend distributed under the “Dividendo Opción” program, described in “Item 4. Information on the Company—Business Overview—Supervision and Regulation—Dividends”) will be treated in the same manner as a distribution of cash, regardless of whether a U.S. Holder elects to receive the dividend in shares rather than cash. If the U.S. Holder elects to receive the dividend in shares, the U.S. Holder will be treated as having received a distribution equal to the U.S. dollar fair market value of the shares on the date of distribution. The U.S. Holder’s tax basis in such
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shares received will be equal to the U.S. dollar fair market value of the shares on the date of distribution and the holding period for such shares will begin on the day following the distribution.
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 at a rate not exceeding the rate the U.S. Holder is entitled to under the Treaty. Spanish taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against the U.S. Holder’s U.S. federal income tax liability. See “Spanish Tax Considerations—Taxation of Dividends” for a discussion of how to obtain the Treaty rate. The rules governing foreign tax credits are complex and, therefore, U.S. Holders should consult their tax advisors regarding the availability of foreign tax credits in their particular circumstances.
Sale and Other Disposition of ADSs or Shares
For U.S. federal income tax purposes, gain or loss realized by a U.S. Holder on the sale or other disposition of ADSs or ordinary shares will be 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 disposed of 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 at the time of disposition. 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
Based upon certain proposed Treasury regulations which are proposed to be effective for taxable years beginning after December 31, 1994 (“Proposed Regulations”), we believe that we were not a PFIC for U.S. federal income tax purposes for our 2011 taxable year. 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 and since there is no guarantee that the Proposed Regulations will be adopted in their current form and because the manner of the application of the Proposed Regulations is not entirely clear, 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 (including certain pledges) 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 individuals or corporations, as appropriate for that taxable year, and an interest charge would be imposed on the amount allocated to such taxable year. The same treatment would apply to any distribution received by a U.S. Holder on its ordinary shares or ADSs to the extent that such distribution exceeds 125% of the average of the annual distributions on the ordinary shares or ADSs received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter. In addition, if we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or the prior taxable year, the 15% dividend rate discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply. Certain elections may be available (including a mark-to-market election) that may provide alternative tax treatments. U.S. Holders should consult their tax advisors regarding whether we are or were a PFIC, the potential application of the PFIC rules to determine whether any of these elections for alternative treatment would be available
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and, if so, what the consequences of the alternative treatments would be in their particular circumstances. 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 may be required to file a report containing such information as the U.S. Treasury may require.
Information Reporting and Backup Withholding
Information returns may be filed with the IRS 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 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 timely furnished to the IRS.
Certain U.S. Holders who are individuals may be required to report information relating to their ownership of an interest in certain foreign financial assets, including stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held in custodial accounts maintained by a U.S. financial institution). Certain U.S. Holders who are entities may be subject to similar rules in the future. U.S. Holders should consult their tax advisors regarding their reporting obligations with respect to the ordinary shares or ADSs.
F. Dividends and Paying Agents
G. Statement by Experts
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 private 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 100 F Street, N.E., Washington, D.C. 20549. 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 or furnished electronically with the SEC, which can be accessed over the internet at http://www.sec.gov.
I. Subsidiary Information
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Financial institutions that deal in financial instruments must assume or transfer one or more types of risks with each transaction. The main risks associated with financial instruments are:
Credit risk: which arises from the possibility that one party to a financial instrument may fail to meet its contractual obligations, causing a financial loss for the other party.
Market risk: which relates to the likelihood of losses with respect to the value of securities held in our portfolio as a result of changes in the market prices of financial instruments. It includes three types of risks:
Interest-rate risk: which arises from variations in market interest rates.
Currency risk: resulting from variations in foreign-currency rates.
Price risk: resulting from variations in market prices, either due to factors specific to the instrument itself, or alternatively to factors which affect all the instruments traded on a specific market.
Liquidity risk: which arises from the possibility that a company cannot meet its payment commitments without having to resort to borrowing funds under onerous conditions, or risking the image and the reputation of the entity.
Value-at-Risk (VaR) is the basic risk measure used to manage and control the Group’s market risks. It estimates the maximum loss at a specific confidence level, for a given portfolio, probability and time horizon. We calculate VaR based on a 99% confidence level and a one-day time horizon.
BBVA, S.A. and BBVA Bancomer have received approval from the Bank of Spain to use a model developed by the Group to calculate bank capital requirements related to market risk. This model estimates VaR in accordance with the “historical simulation” methodology, which consists of estimating the losses or gains that would have been produced in the current portfolio if the changes in market conditions occurring over a specific period of time were repeated. Using this information, we infer the maximum foreseeable loss in the current portfolio with a determined level of confidence. This methodology presents the advantage of replicating historical market variables rather than requiring the assumption of any specific probability distribution. The historical period used in this model is two years.
In addition, the Bank follows the guidelines set out by Spanish and European authorities regarding other metrics, including the Bank of Spain’s regulatory requirements. The new measurements of market risk for the trading portfolio include the calculation of stressed VaR (which quantifies the level of risk in extreme historical situations) and the quantification of default risks and the downgrading of credit ratings of bonds and credit portfolio derivatives.
We determine a system of VaR and economic capital limits by market risk for each business unit, with specific ad-hoc sub-limits by type of risk, activity and trading desk.
Validity tests are performed periodically on the risk measurement models used by the Group. They estimate the maximum loss that could have been incurred in the securities assessed with a certain level of probability (back-testing), as well as measurements of the impact of extreme market events on risk positions (stress testing). In addition, BBVA Research (the BBVA Group’s Research Department) carries out stress analysis by simulating historical crisis scenarios and evaluating the impacts resulting from profound market alterations.
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Market Risk Management
Market Risk in Trading Portfolio in 2011
The market risk factors used to measure and control risks in the trading portfolio are the basis of all calculations using the VaR.
VaR measures the maximum loss with a given probability over a given period as a result of changes in the general conditions of financial markets and their effects on market risk factors. We mainly conduct daily VaR estimates using the historic simulation methodology.
The types of risk factors we use to measure VaR are:
Interest rate risk: the potential loss in value of the portfolio due to movements in interest rate curves. We use all interest rate curves in which we have positions and risks exist. We also use a wide range of vertices reflecting the different maturities within each curve.
Credit spread risk: the potential loss in the value of corporate bonds or any corporate bond derivatives caused by movements in credit spreads for such instruments. Credit spread VaR is estimated by moving the credit spreads used as risk factors through a range of scenarios. The risk factors used in the simulation are credit spread curves by sector and by rating, and specific spread curves for individual issuers.
Exchange rate risk: the potential loss caused by movements in exchange rates. Exchange rate risk VaR is estimated by analyzing present positions with observed actual changes in exchange rates.
Equity or commodity risk: the potential loss caused by movements in equity prices, stock-market indices and commodity prices. Equity or commodity risk VaR is estimated by re-measuring present positions using actual changes in equity prices, stock-market indices and commodity prices.
Vega risk: the potential loss caused by movements in implied volatilities affecting the value of options. Vega (equities, interest rate and exchange rate) risk VaR is estimated by analyzing implied volatility surfaces with observed changes in the implied volatilities of equity, interest rate and exchange rate options.
Correlation risk: the potential loss caused by a disparity between the estimated and actual correlation between two assets, currencies, derivatives, instruments or markets.
In addition, all these measurements are supplemented with VaR estimation with exponential smoothing, to better reflect the impact of movements.
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The evolution of the BBVA Group’s market risk during 2011, measured as VaR without smoothing, with a 99% confidence level and 1-day horizon, was as follows:
Market Risk Evolution
The average daily VaR was €24 million in 2011, compared with €33 million in 2010 and €26 million in 2009. The changes in the average daily VaR ratio in 2011 with respect to 2010 are basically the result of market activity in Europe, which reduced its average risk by 24% in 2011 (with a daily average VaR of €16 million) and, to a lesser extent, due to the market activity in Mexico, which reduced its average risk by 39% (with a daily average VaR in 2011 of €5 million).
The number of risk factors currently used to measure portfolio risk is around 2,200. This number varies according to the possibility of doing business with other underlying assets and in other markets.
By type of market risk assumed by the Group’s trading portfolio as of December 31, 2011, the main risks were interest rate and credit spread risks, which fell by€3 million compared with December 31, 2010. Equity risk increased by€3 million compared with December 31, 2010, while currency risk and volatility and correlation risk fell by €0.1 million and€8 million compared with December 31, 2010, respectively. The table below shows the components of VaR as of December 31, 2011 and 2010, respectively, and the average, maximum and minimum VaRs for the years then ended.
Risk
Interest/Spread risk
Currency risk
Stock-market risk
Vega/Correlation risk
Diversification effect(*)
VaR average in the period
VaR max in the period
VaR min in the period
The diversification effect is the difference between the sum of the average individual risk factors and the total VaR figure (which implicitly reflects the correlation between all the individual risk factors and scenarios used in the measurement).
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Stress testing is carried out using the historical crisis scenarios and economic scenarios drawn up by BBVA Research as a base:
Historical scenarios. The base historical scenario is the collapse of Lehman Brothers in 2008.
Economic crisis scenarios. Unlike the historical scenarios, economic stress scenarios are updated monthly. The decision about which of the scenarios should be used is taken by the Market Stress Committee, in which BBVA Research takes an active part through the construction of ad hoc scenarios. The fundamental aim of this committee is to identify the most significant market risk positions in each of the BBVA Group’s treasuries and assess the impact of changes in their risk drivers. To do so, the Stress Committee must identify and quantify unlikely but plausible crisis scenarios in the financial markets. This is achieved thanks to the participation of BBVA Research as a key member of the Committee. In addition, the economic stress scenarios are designed individually and are coherent with the positions of each of the treasuries. Consequently, there may be no coherence at Group level and thus the impacts cannot be aggregated.
The internal market risk model is validated periodically by back-testing. The back-testing comparison performed with market risk management results for the parent company (which accounts for most of the Group’s market risk) follows the principles set out in the Basel Accord. It makes a day-on-day comparison between actual risks and those estimated by the model, and proved that the risk measurement model continued to work correctly throughout 2011.
In 2011, portfolio losses in BBVA, S.A. were higher than daily VaR on three occasions (two in the case of BBVA Bancomer). This number of exceptions is within the bands set in the tests used in the Basel model. Accordingly, no significant changes have been made neither to the methodology of measurement, nor to the parameters of the current measurement model.
BBVA, S.A. internal back-testing model 2011
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By geographical area, and as an annual average, 68.5% of the market risk in 2011 corresponded to our trading desks in Europe, the U.S. and Asia and 31.5% to the Group’s banks in Latin America, 19.3% of which was in Mexico. Information related to Asia is included under “Europe and USA” in the chart below.
Market risk by geographical area
(Average 2011)
The breakdown of our risk exposure by categories of the instruments within the trading portfolio as of December 31, 2011, 2010 and 2009 was as follows:
Financial assets held for trading
Debt securities
Trading derivatives
Market Risk in Non–Trading Activities in 2011
Structural Interest Rate Risk
Structural interest rate risk refers to the potential alteration of a company’s net interest income and/or total net-asset value caused by variations in interest rates. A financial institution’s exposure to adverse changes in market rates is a risk inherent in the banking business, while also presenting an opportunity to create value.
In 2011, the climate of uncertainty with respect to economic recovery maintained interest rates low and led to falls in long-term interest rates in Europe, the United States and Mexico. In contrast, in South America there was a steady upswing in interest rates as a result of the growth rates observed in the region.
Movements in interest rates lead to changes in a bank’s net interest income and book value, which constitutes a key source of asset and liability interest rate risk. The extent of impacts of this kind will depend on the bank’s exposure to changes in interest rates. This exposure is mainly the result of the
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time difference between the repricing and maturities of the different products on the banking book. The accompanying chart shows the gaps in BBVA’s structural balance sheet in euros as of December 31, 2011.
Gap of maturities and repricing dates of BBVA’s structural balance sheet in euros
As stated above, a financial institution’s exposure to adverse changes in interest rates is a risk inherent in the banking business, while at the same time representing an opportunity to generate value. This is why the management of asset and liability interest rate risk takes on particular importance in the current environment. This function falls to the Balance Sheet Management unit, within the Financial Management area. Working through the Assets and Liabilities Committee (“ALCO”) within each management unit and the Group’s ALCO, it is in charge of maximizing the Bank’s economic value, preserving the net interest income and guaranteeing the generation of recurrent earnings. To do so, it develops various strategies based on its expectations of the market. It seeks to achieve the risk profile defined by the BBVA Group’s management bodies and maintain a balance between expected results and the level of risk assumed. BBVA has a transfer pricing system, which centralizes the Bank’s interest rate risk on ALCO’s books and is designed to facilitate proper balance sheet risk management.
The Corporate Risk Management (“CRM”) area is responsible for controlling and monitoring asset and liability interest rate risk, acting as an independent unit to guarantee that the risk management and control functions are properly segregated. This policy is in line with the Basel Committee on Banking Supervision recommendations. The CRM area also calculates the asset and liability interest rate risk measurements used by the Group’s management, designs measurement models and systems and develops monitoring, information and control systems. In addition, it carries out the function of risk control and analysis through the Risk Management Committee (“RMC”). Information produced by the CRM is then reported to the main governing bodies, such as the Executive Committee and the Board of Director’s Risk Committee.
The BBVA Group has a structural interest rate risk model made up of a set of metrics and tools which objective is to enable its risk profile to be monitored precisely. For accurately characterizing the balance sheet, analysis models have been developed to establish assumptions dealing fundamentally with expected loans amortization and the behavior of deposits with no explicit maturity. In addition to risks associated with parallel movements from cash-flow mismatch, the model includes other sources of risk such as changes in the yield slope and curve. This is done by applying a simulation model of interest rate curves that quantify risks in probabilistic terms and take into account the diversity of
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currencies and business units. This calculates the Group’s earnings at risk (EaR) and economic capital, defined as the maximum adverse deviations in net interest income and economic value, respectively, for a particular confidence level and time horizon. The model is periodically subjected to internal validation through the back-testing of the simulation model and the assumptions.
In addition, sensitivity is measured to a standard deviation of 100 basis points for all the market yield curves. The chart below shows the asset and liability interest rate profile of the main entities in the BBVA Group, according to their sensitivities, as of December 31, 2011.
The risk appetite of each entity is determined by the Executive Committee and expressed through the limits structure, which is one of the mainstays in our control policies. The maximum negative impacts, in terms of both earnings and value, are in this way controlled in each of the Group’s entities through a limits policy. Active balance sheet management in 2011 has enabled the Group’s exposure to be maintained in keeping with its target risk profile, as presented in the chart below, which shows average limits used in each of the Group entities.
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Europe
The risk measurement model is supplemented by analysis of specific scenarios and stress tests. Stress tests have taken on particular importance in recent years. Progress has therefore been made in the analysis of extreme scenarios in a possible breakthrough in both current interest rate levels and historical correlations and volatility. At the same time, the evaluation of scenarios forecast by BBVA Research has been maintained. In addition, monitoring of the contribution to risk by portfolios, factors and regions, and its subsequent integration into joint measurements, continued during 2011.
The table below shows the estimated impact on the BBVA Group’s net interest income and economic value for 2011 of a 100 basis point increase and decrease in average interest rates for the year.
BBVA Group
Percentage relating to equity.
Structural Exchange Rate Risk
Structural exchange rate risk management in BBVA aims to minimize the potential negative impact from fluctuations in exchange rates on the book value and the contribution to earnings of international investments maintained on a long-term basis by the Group.
The CRM area acts as an independent unit responsible for monitoring and analyzing risks, standardizing risk management metrics and providing tools that can anticipate potential deviations from targets. It also monitors the level of compliance with established risk limits, and reports regularly to the RMC, the Board of Directors’ Risk Committee and the Executive Committee, particularly in the case of deviation or tension in the levels of risk assumed.
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The Balance Sheet Management unit, through ALCO, designs and executes the hedging strategies with the main objective of minimizing the effect of exchange rate fluctuations on capital adequacy ratios, as well as assuring the equivalent value in euros of the foreign-currency earnings of the Group’s various subsidiaries, adjusting transactions according to market expectations and hedging costs. The Balance Sheet Management area carries out this work by ensuring that the Group’s risk profile is, at all times, adapted to the framework defined by the limits structure authorized by the Executive Committee. To do so, it uses risk metrics obtained according to the corporate model designed by the CRM area.
The corporate model is based on simulating exchange rate scenarios, based on historical trends, and evaluating the impact on capital ratios, equity and the Group’s income statement. This provides a distribution of the impact on the three core elements, which helps determine their maximum adverse deviation for a particular confidence level and time horizon, depending on market liquidity in each currency. The risk measurements are completed with analysis of scenarios, stress testing and back-testing, thus giving a complete overview of the Group’s exposure to structural exchange rate risk.
In 2011, in an environment of uncertainty and market volatility, particularly in the second half of the year, a policy of prudence has been maintained and hedging extended in the currencies with the greatest exposure. This has moderated the risk assumed, despite the growing contribution of the “non-euro” area to the Group’s earnings and equity. The average hedging level of the carrying value of the BBVA Group’s holdings in foreign currency was close to 30% as of December 31, 2011. Hedging of foreign currency earnings also remained high during 2011, at levels close to 40%. At the end of the year, there was still significant hedging of forecast foreign currency earnings for 2012.
Structural Risk in Equity Portfolio
The CRM area monitors structural risk in its equity portfolio on an ongoing basis in order to limit the negative impact that an adverse performance by its holdings may have on the Group’s solvency and earnings recurrence. This ensures that the risk is maintained within levels that are compatible with BBVA’s target risk profile.
The scope of monitoring includes the holdings that the Group has in the capital of other industrial or financial companies with a medium or long-term investment horizon. Both holdings accounted for as an investment portfolio and those that are consolidated in the accounts are included, although in the latter case changes in value do not have an immediate effect on equity. In order to determine exposure, the positions held in derivatives are considered in order to limit portfolio sensitivity to potential falls in prices.
This monitoring function is carried out by the CRM area by making estimates of the levels of risks assumed, and complementing this with periodic checks using stress tests and back-testing, as well as scenario analysis. It also monitors the level of compliance with the limits authorized by the Executive Committee, and periodically informs the Group’s senior management of these aspects. The mechanisms of risk control and limitation hinge on the key aspects of exposure, earnings and economic capital. Economic capital measurements are also built into the risk-adjusted return metrics to ensure efficient capital management in the Group.
In 2011, in a context of high stock-market volatility, structural equity risk management has been aimed at safeguarding the book value of the Group’s holdings. Thus, active position management, together with its hedging policy, has enabled the Bank to maintain risk, measured in terms of economic capital, at moderate levels.
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Liquidity Risk Management
The aim of liquidity risk management, tracking and control is to ensure, in the short-term, that the payment commitments of BBVA Group entities can be duly met without having to resort to borrowing funds under burdensome terms, or damaging the image and reputation of the entities. In the medium-term, its aim is to ensure that the Group’s financing structure is ideal and that it is moving in the right direction with respect to the economic situation, the markets and regulatory changes.
Management of liquidity and structural finance in the BBVA Group is based on the principle of financial autonomy of the entities that form it. This approach helps prevent and limit liquidity risk by reducing the Group’s vulnerability in periods of high risk.
The management and monitoring of liquidity risk is carried out comprehensively in each of the BBVA Group’s business units using a double (short and long-term) approach. The short-term liquidity approach has a time horizon of up to 366 days. It is focused on the management of payments and collections from the Treasury and Market activity and includes operations specific to the area and the Bank’s possible liquidity requirements. The medium-term approach is focused on financial management of the whole consolidated balance sheet, with a time horizon of one year or more.
The ALCO within each management unit is responsible for the comprehensive management of liquidity. The Financial Management unit, as part of the Financial Division, analyzes the implications of the Bank’s various projects in terms of finance and liquidity and its compatibility with the target financing structure and the situation of the financial markets. The Financial Management unit executes the resolutions agreed by the ALCO, in accordance with the agreed budgets and manages liquidity risk using a broad scheme of limits, sub-limits and alerts approved by the Executive Committee. The CRM measures and controls these limits independently and provides the managers with support tools and metrics needed for decision-making.
Each of the local risk Areas, which are independent from the local manager, complies with the corporative principles of liquidity risk control established by the Global Market Risk (“GRM”) unit, the global unit responsible for the structural risks for the entire BBVA Group.
At the level of each BBVA Group entity, the managing areas request and propose a scheme of quantitative and qualitative limits and alerts related to short and medium-term liquidity risks. Once agreed with GRM, controls and limits are proposed to the Bank’s Board of Directors (through its delegate bodies) for approval at least once a year. The proposals submitted by GRM are adapted to the situation of the markets according to the Group’s target risk tolerance level.
The development of a new Liquidity and Finance Manual in 2011 demanded strict adjustment of liquidity risk management in terms of limits, sub-limits and alerts, as well as in procedures. In accordance with the manual, GRM carries out regular measurements of risk incurred and monitors the consumption of limits. It develops management tools and adapts valuation models, carries out regular stress tests and reports on the liquidity risk levels to ALCO and the Group’s Management Committee on a monthly basis. Its reports to the management areas and GRM Management Committee are more frequent.
Under the current Contingency Plan, the frequency of communication and the nature of information provided is decided by the Liquidity Committee at the proposal of the Technical Liquidity Group (“TLG”). In the event of any alert or possible crisis, the TLG carries out an initial analysis of the liquidity situation (short or long-term) of the entity affected.
The TLG is made up of specialized staff from the Short-Term Cash Desk, the Global Accounting & Information Management (GA&IM), the Financial Management and the Structural Risk areas. If the
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alert signals established make clear that a critical situation has arisen, the TLG informs the Liquidity Committee (made up of managers of the corresponding areas). The Liquidity Committee is responsible for calling the Financing Committee, if appropriate, which is made up of the Group’s President and COO and the managers of the Financial Area, the CRM area, Global Business and the Business Area of the country affected.
One of the most significant aspects that have affected the BBVA Group in 2011 was the continuation of the sovereign debt crisis, which started in 2010. The role played by official bodies in the Eurozone and the ECB have been key in calming the markets and ensuring liquidity in the European banking system. However, the Group has not had to make use of the extraordinary measures established by the Spanish authorities to mitigate the liquidity tension affecting many Spanish banks.
Given this situation, the regulators have established new regulatory requirements with the goal of strengthening the balance sheets of banks and making them more resistant to potential short-term liquidity shocks. The Liquidity Coverage Ratio (LCR) is the metric proposed by the Bank Supervisory Committee of the Bank for International Settlements in Basel to achieve this objective. The metric focuses on ensuring that financial institutions have a sufficient stock of liquid assets to allow them to survive a 30-day liquidity stress scenario. According to the document published by the Basel Committee on Bank Supervision in December 2010, this ratio will remain subject to revision by the regulating bodies until mid-2013, and it will be incorporated as a regulatory requirement on January 1, 2015, though it must be reported to supervisory bodies as of January 2012.
In order to increase the weight of medium and long-term funding on the banks’ balance sheets, the regulators have defined a new long-term funding ratio (over 12 months) called the Net Stable Funding Ratio (NSFR). It will be under review until mid-2016 and become a regulatory requirement starting on January 1, 2018.
Although the precise definition of these new ratios has still not been decided, the BBVA Group has outlined a plan to adapt to them. This is expected to allow the Group to adopt best practices and the most effective and strict criteria for their implementation sufficiently in advance.
Below is a breakdown by contractual maturity of the balances of certain headings in our consolidated balance sheets as of December 31, 2011, 2010 and 2009:
ASSETS—
Derivatives (trading and hedging)
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LIABILITIES—
Short positions
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Other assets
Credit Risk Management
Credit risk is defined as the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge a contractual obligation due to the insolvency or incapacity of the natural or legal persons involved.
Maximum exposure to credit risk
The BBVA Group’s maximum credit risk exposure by headings in the balance sheet as of December 31, 2011, 2010 and 2009, is detailed in the table below. It does not recognize the availability of collateral or other credit enhancements to guarantee compliance with payment obligations. The details are broken down by financial instrument and counterparties.
Maximum Credit Risk Exposure
Financial assets held for trading(1)
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Other financial assets designated at fair value through profit or loss(1)
Available-for-sale financial assets(1)
Loans and receivables(1)
Industry
Trade and finance
Held-to-maturity investments(1)
Derivatives (trading and hedging)(2)
Subtotal
Total balance
Financial guarantees(3)
Drawable by third parties
Other contingent exposures
Total off-balance
Total maximum credit exposure
In the case of financial assets recognized in our consolidated balance sheet, exposure to credit risk is considered equal to their gross accounting value, not including valuation adjustments (impairment losses, uncollected interest payments, derivatives and others).
Reflects their market value on the date of the transactions and the estimated potential risk of these transactions on their due date. Accordingly, these amounts are different from those reflected in our
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balance sheet (which only considers their carrying amounts). We believe the information on trading and hedging derivatives set out in this table to provide a better reflection of the related maximum credit risk exposure. Credit risk originating from derivatives is mitigated through the contractual rights existing for offsetting accounts at the time of their settlement. This has reduced the Group’s exposure to credit risk to €37,817 million as of December 31, 2011 (€27,933 million and €27,026 million as of December 31, 2010 and 2009, respectively).
Represents the maximum amount that the Group would be liable for if these guarantees were called in, which is equivalent to their carrying amount.
The amount of financial assets that would be irregular if their conditions had not been renegotiated is not significant with respect to the BBVA Group’s total loans and receivables as of December 31, 2011.
Mitigation of credit risk, collateral and other credit enhancements, including risk hedging and mitigation policies
In most cases, maximum exposure to credit risk is reduced by collateral, credit enhancements and other actions which mitigate our exposure.
We apply a credit risk hedging and mitigation policy deriving from a banking approach focused on relationship banking. The existence of guarantees could be a necessary but not sufficient instrument for accepting risks, because the assumption of risks by the Group requires the prior verification of the debtor’s capacity for repayment, or the debtor’s ability to generate sufficient resources to allow for the amortization of the risk incurred under the agreed terms.
The policy of accepting risks is therefore organized into three different levels in the BBVA Group:
Analysis of the financial risk of the operation, based on the debtor’s capacity for repayment or generation of funds;
The creation of guarantees that are adequate, or generally accepted, based on the risk assumed (i.e. monetary, secured, personal or hedge guarantees); and
Assessment of the repayment risk (asset liquidity) of the guarantees received.
The procedures for the management and valuation of collaterals are set out in the Internal Manuals on Credit Risk Management Policies (retail and wholesale), which establish the basic principles for credit risk management, including the management of collateral assigned in transactions with customers.
The methods used for the valuation of the collateral are consistent with the best market practices and imply the use of appraisal of real estate collateral, the market price in securities, the trading price of shares in mutual funds, etc. All collaterals assigned must be properly recorded and entered in the corresponding register. They must also have the approval of the Group’s legal units.
The following is a description of the main collateral for each financial instrument class:
Financial assets held for trading: the guarantees or credit enhancements obtained directly from the issuer or counterparty are implicit in the clauses of the instrument.
Trading and hedging derivatives: in derivatives, credit risk is minimized through contractual netting agreements, where positive- and negative-value derivatives with the same counterparty are offset for their net balance. There may likewise be other kinds of guarantees, depending on counterparty solvency and the nature of the transaction.
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The Group trades a wide range of credit derivatives. Through these contracts, the Group either purchases or sells protection on either a single-name or index basis. The Group uses credit derivatives to mitigate credit risk in its loan portfolio and other cash positions and to hedge risks assumed in other market transactions with clients and counterparties. Credit derivatives can follow different settlement and payment conventions, all of which are in accordance with the ISDA standards. The most common types of settlement triggers include bankruptcy of the reference credit entity, acceleration of indebtedness, failure to pay, restructuring, repudiation and dissolution of the entity. Since we typically confirm over 99% of our credit derivative transactions in the Depository Trust & Clearing Corporation (DTCC), substantially all of our credit derivatives portfolio is registered and matched against our counterparties.
Other financial assets and liabilities designated at fair value through profit or loss and Available-for-sale financial assets: the guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent in the structure of the instrument.
Loans and receivables:
Loans and advances to credit institutions. These usually only have the counterparty’s personal guarantee.
Total lending to customers. Most of these operations are backed by personal guarantees extended by the counterparty. There may also be collateral to secure loans and advances to customers (such as mortgages, cash guarantees, pledged securities and other collateral), or to obtain other credit enhancements (bonds, hedging, etc.).
Debt securities. Guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent in the structure of the instrument.
Held-to-maturity investments: guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent in the structure of the instrument.
Financial guarantees, other contingent exposures and drawable by third parties: these have the counterparty’s personal guarantee.
Our collateralized credit risk as of December 31, 2011, 2010 and 2009, excluding balances deemed impaired, is broken down in the table below:
Collateralized Credit Risk
Mortgage loans
Operating assets mortgage loans
Home mortgages
Rest of mortgages (1)
Secured loans, except mortgage
Cash guarantees
Secured loan (pledged securities)
Rest of secured loans (2)
Refers to real estate loans which are secured with properties (other than residential properties) in respect of which we provide financing to the borrower to buy or to construct such properties.
Includes loans whose collateral consists of cash, other financial assets or partial guarantees.
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As of December 31, 2011, in relation to mortgages, the average weighted amount pending loan amortization was 52% of the collateral pledged (53% as of December 31, 2010 and 54% as of December 31, 2009).
Credit quality of financial assets that are neither past due nor impaired
We have enhanced our credit quality requirements for new loan generation by applying stricter criteria to new transactions with Spanish customers based on their creditworthiness. In particular, we have lowered the maximum acceptable percentage which monthly principal and interest payments associated with a proposed new loan may represent of the monthly income of the relevant customer to a range of 33%-50%, depending on available collateral and other financial guarantees. We have also lowered our maximum acceptance loan-to-value ratio (i.e. requiring more collateral per unit of lending) to a range of 80-100%, depending on available collateral and other guarantees. We have focused our efforts on reducing our real estate exposure mainly by decreasing new loan generation, mainly in Spain, and improving loan recovery in the real estate sector.
We have tools (“scoring” and “rating”) that enable us to rank the credit quality of our operations and customers based on an assessment of each such operation or customer and its correspondence with our probability of default (“PD”) scales. To analyze the performance of PD, the Group uses a series of tracking tools and historical databases that collect the pertinent information generated internally, which can be grouped together in scoring and rating models.
Scoring
Scoring is a decision-making model that contributes to both the arrangement and management of retail loans (consumer loans, mortgages, credit cards for individuals, etc). Scoring is the tool used to decide to whom a loan should be assigned, what amount should be assigned and what strategies can help establish the price, as it is an algorithm that sorts transactions by their credit quality. This algorithm enables the BBVA Group to assign a score to each transaction proposed by a customer, on the basis of a series of objective characteristics that have statistically been shown to discriminate between the quality and risk of this type of transactions. The advantage of scoring lies in its simplicity and homogeneity. All that is needed is a series of objective data for each customer, and this data is analyzed automatically using an algorithm.
There are three types of scoring based on the information used and its purpose:
Reactive scoring: measures the risk of a transaction requested by an individual using variables relating to the requested transaction and to the customer’s socio-economic data available at the time of the request. The new transaction is approved or rejected depending on the score given.
Behavioral scoring: scores transactions for a given product in an outstanding risk portfolio of the entity, enabling the credit rating to be tracked and the customer’s needs to be anticipated. It uses transaction and customer variables available internally. Specifically, variables that refer to the behavior of both the product and the customer.
Proactive scoring: gives a score at customer level using variables related to the individual’s general behavior with the entity, and to his/her payment behavior in all the contracted products. The purpose is to track the customer’s credit quality and it is used to pre-grant new transactions.
Rating
Rating tools, as opposed to scoring tools, do not assess transactions but focus on the rating of customers (companies, corporations, SMEs, public authorities, etc) instead. A rating tool is an
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instrument that, based on a detailed financial study, helps determine a customer’s ability to meet his/her financial obligations. The final rating is usually a combination of various factors: on the one hand, quantitative factors, and on the other hand, qualitative factors. It is a middle road between an individual analysis and a statistical analysis.
The main difference between ratings and scorings is that the latter are used to assess retail products, while ratings use a wholesale banking customer approach. Moreover, scorings only include objective variables, while ratings add qualitative information. And although both are based on statistical studies, adding a business view, rating tools give more weight to the business criterion compared to scoring tools.
For portfolios where the number of defaults is very low (sovereign risk, corporations, financial entities, etc.) the internal information is supplemented by “benchmarking” of the external rating agencies (Moody’s, Standard & Poor’s and Fitch). To this end, each year the PDs compiled by the rating agencies at each level of risk rating are compared, and the measurements compiled by the various agencies are mapped against those of the BBVA Master Rating Scale.
Once the PD of a transaction or customer has been calculated, a “business cycle adjustment” is carried out. This is a means of establishing a measure of risk that goes beyond the time of its calculation. The aim is to capture representative information of the behavior of portfolios over a complete economic cycle. This probability is linked to the Master Rating Scale prepared by the BBVA Group to enable uniform classification of the Group’s various asset risk portfolios.
The table below shows the abridged scale used to classify our outstanding risk as of December 31, 2011:
Internal RatingReduced List (17 groups)
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
C
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The table below outlines the distribution of exposure, including derivatives by internal ratings, to corporations, financial entities and institutions (excluding sovereign risk), of the BBVA Group’s main entities as of December 31, 2011:
Credit Risk Distribution by Internal Rating
AAA/AA+/AA/AA-
A+/A/A-
CCC/CC
Policies and procedures for preventing excessive risk concentration
In order to prevent the build-up of excessive concentrations of credit risk at the individual, country and sector levels, we maintain maximum permitted risk concentration indices updated at the individual and portfolio sector levels tied to the various observable variables within the field of credit risk management. Accordingly, the limit on the Group’s exposure or financial commitment to a specific customer depends on the customer’s credit rating, the nature of the risks involved, and the Group’s presence in a given market, based on the following guidelines:
To the extent that it is possible, the goal is to combine the customer’s credit needs (commercial/financial, short-term/long-term, etc.) with the interests of the Group.
Any legal limits that may exist concerning risk concentration are taken into consideration, such as the relationship between risks vis-à-vis a particular customer and the capital of the entity that assumes said risks, market volatility, the macroeconomic situation, etc.
In order to properly manage risk concentration and, if necessary, take action on such risks, various different levels of monitoring have been implemented according to the global risk level of a customer. Any risk concentrations with one customer or group that are expected to generate losses of more than €18 million are authorized and monitored directly by the Bank’s Board of Directors Risk Committee. In terms of exposure, this amount is equivalent to 10% of the BBVA Group’s eligible capital for a customer with an AAA credit rating and 1% for a customer with a BB credit rating.
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Financial assets past due but not impaired
The table below provides details of financial assets past due as of December 31, 2011, 2010 and 2009 but not considered to be impaired, listed by their first due date:
Financial Assets Past Due butNot Impaired
Impaired assets and impairment losses
The table below shows the composition of the balance of the impaired financial assets and risks as of December 31, 2011, 2010 and 2009, broken down by heading in the accompanying consolidated balance sheet:
Impaired RisksBreakdown by Type of Asset and by Sector
IMPAIRED RISKS ON BALANCE
Available-for-sale financial assets
Total Impaired Risks on Balance(1)
Impaired Risks Off Balance(2)
Impaired contingent liabilities
TOTAL IMPAIRED RISKS(1)+(2)
Mortgage
With partial secured loans
TOTAL IMPAIRED RISKS
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The changes in 2011, 2010 and 2009 in the impaired financial assets and contingent risks are as follows:
Changes in Impaired FinancialAssets and Contingent Liabilities
Balance at the beginning
Additions(1)
Recoveries(2)
Net additions(1)+(2)
Transfers to write-off
Exchange differences and other
Balance at the end
Recoveries on entries(%)
The increase in our recoveries on entries rate from 38% in 2009 to 69% in 2010 and 70% in 2011 was mainly attributable to the following factors:
In 2010, we created a new department in each business area focused on recoveries of substandard loans.
The average length of time between when an asset becomes past due to the completion of the foreclosure process (which lasts an average of 12-18 months) is 15-35 months. Accordingly, there is a delay between the recognition of an impaired loan secured by a mortgage and the related mortgage recovery. In 2009/2010 we started the foreclosure sale processes related to our impaired loans secured by mortgages recognized as such in 2008. Foreclosed assets amounted to €1,417 million and €1,513 million in 2011 and 2010, respectively, compared to €801 million in 2009.
There has been a significant increase in the amount of real estate assets received in lieu of payment, in discharge of impaired loans (from €639 million in 2009 to 1,358 million and €1,618 million in 2010 and 2011, respectively).
Below are details of the impaired financial assets as of December 31, 2011 and 2010, classified by geographical area and by the time since their oldest past-due amount or the period since they were deemed impaired:
Rest of Europe
Rest of the world
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Below are details of the impaired financial assets as of December 31, 2011 and 2010, classified by type of loan in accordance with its associated guarantee, and by the time since their oldest past-due amount or the period since they were deemed impaired:
Unsecured loans
Residential mortgage
Commercial mortgage (rural properties in operation and offices, and industrial buildings)
Rest of residential mortgage(1)
Plots and other real estate assets
Other partially secured loans
Others
Refers to residential real estate loans which are secured by properties (other than those currently used as the family residential property of the borrower) and to loans through which we provide financing to a borrower to construct residential properties until such properties are finished and sold.
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Below is the accumulated financial income accrued from impaired assets as of December 31, 2011, 2010 and 2009 that are not recognized in our consolidated income statement due to the existence of doubts as to the collection of these assets:
Financial income from impaired assets
As of December 31, 2011, 2010 and 2009, the non-performing loan and coverage ratios of the transactions recorded under the “Loans and advances to customers” and “Contingent risk” headings of our consolidated balance sheet were as follows:
NPA ratio
NPA coverage ratio
Impairment losses
Below is a breakdown of the provisions recorded on our consolidated balance sheet covering estimated impairment losses in financial assets and contingent risks as of December 31, 2011, 2010 and 2009, classified according to the different headings used in our consolidated balance sheet:
Impairment Losses
Available-for-sale portfolio
Held to maturity investment
Provisions to Contingent Risks and Commitments
For impaired portfolio
For currently non-impaired portfolio
Below are the changes in the estimated impairment losses for the years ended December 31, 2011 and 2010, broken down by the headings used in our consolidated balance sheet:
Increase in impairment losses charged to income
Decrease in impairment losses credited to income
Impairment losses (net)
Entities incorporated in the year
Transfers to written-off loans
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The following table shows the changes in impaired financial assets written off from the balance sheet for the years ended December 31, 2011, 2010 and 2009 because the possibility of their recovery was deemed remote:
Changes in the Impairment of Financial AssetsWritten-Off from the Balance Sheet
Increase
Decrease
Re-financing or restructuring
Cash recovery
Foreclosed assets
Sales of written-off
Debt forgiveness
Time-barred debt and other causes
As indicated in Note 2.2.1 to our Consolidated Financial Statements, although they are not recognized in our consolidated balance sheet, we continue to attempt to collect on these write-offs until our rights to receive the related assets are fully extinguished, either because they become time-barred debt, the debt is forgiven, or other reasons.
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Risk Concentrations
The tables below show a breakdown of the balances of financial instruments registered in our consolidated balance sheet according to their concentration in geographical areas and to the residence of the customer or counterparty, as of December 31, 2011, 2010 and 2009. It does not take into account valuation adjustments, impairment losses or loan-loss provisions.
2011 Risks On-Balance
Equity instruments
Derivatives
Other financial assets designated at fair value through profit or loss
Held-to-maturity investments
Hedging derivatives
Total risks in financial assets
Risks Off-Balance
Financial guarantees
Contingent exposures
Total contingent risks
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2010 Risks On-Balance
2009 Risks On-Balance
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A. Debt Securities
B. Warrants and Rights
C. Other Securities
D. American Depositary Shares
Our ADSs are listed on the New York Stock Exchange under the symbol “BBVA”. The Bank of New York Mellon is the depositary (the “Depositary”) issuing ADSs pursuant to an amended and restated deposit agreement dated June 29, 2007 among BBVA, the Depositary and the holders from time to time of ADSs (the “Deposit Agreement”). Each ADS represents the right to receive one share. The table below sets forth the fees payable, either directly or indirectly, by a holder of ADSs as of the date of this Annual Report.
Category
Depositary Actions
Associated Fee / By Whom Paid
(a) Depositing or substituting the underlying shares
Up to $5.00 for each 100 ADSs (or portion thereof) evidenced by the new ADSs delivered (charged to person depositing the shares or receiving the ADSs)
(b) Receiving or distributing dividends
Not applicable
(c) Selling or exercising rights
(d) Withdrawing an underlying security
Up to $5.00 for each 100 ADSs (or portion thereof) evidenced by the ADSs surrendered (charged to person surrendering or to person to whom withdrawn securities are being delivered)
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(e) Transferring, splitting or grouping receipts
(f) General depositary services, particularly those charged on an annual basis
(g) Expenses of the Depositary
Expenses incurred on behalf of holders in connection with
• stock transfer or other taxes (including Spanish income taxes) and other governmental charges;
• cable, telex and facsimile transmission and delivery charges incurred at request of holder of ADS or person depositing shares for the issuance of ADSs;
• transfer, brokerage or registration fees for the registration of shares or other deposited securities on the share register and applicable to transfers of shares or other deposited securities to or from the name of the custodian;
• reasonable and customary expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars
Expenses payable by holders of ADSs or persons depositing shares for the issuance of ADSs; expenses payable in connection with the conversion of foreign currency into U.S. dollars are payable out of such foreign currency
The Depositary may remit to us all or a portion of the Depositary fees charged for the reimbursement of certain of the expenses we incur in respect of the ADS program established pursuant to the Deposit Agreement upon such terms and conditions as we may agree from time to time. In the year ended December 31, 2011, the Depositary reimbursed us $589 thousand with respect to certain fees and expenses. The table below sets forth the types of expenses that the Depositary has agreed to reimburse and the amounts reimbursed in 2011.
Category of Expenses
NYSE Listing Fees
Investor Relations Marketing
Professional Services
Annual Shareholders’ General Meeting Expenses
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Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of December 31, 2011, 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 Chief Global Accounting and Information Management Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). There are inherent limitations to the effectiveness of any control system, including disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives.
Based upon their evaluation, BBVA’s Chairman and Chief Executive Officer, President and Chief Operating Officer and Chief Global Accounting and Information Management Officer concluded, that BBVA’s disclosure controls and procedures are effective at a reasonable assurance level in ensuring that information relating to BBVA, including its consolidated subsidiaries, required to be disclosed in reports that it files under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to the management, including principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
During 2012 we have implemented certain procedural changes in our filing process in order to further bolster and strengthen our disclosure controls and procedures in light of the fact that the exhibits to certain Forms 6-K submitted to the SEC were inadvertently omitted at the time of their original submission due to a technical anomaly resulting from the possible defective use of the software we used in making such submissions.
Management’s Report on Internal Control Over Financial Reporting
The management of BBVA is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. BBVA’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of BBVA;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of BBVA’s management and directors; and
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Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of BBVA’s management, including our Chairman and Chief Executive Officer, President and Chief Operating Officer and Chief Accounting Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, our management concluded that, as of December 31, 2011, our internal control over financial reporting was effective based on those criteria.
Our internal control over financial reporting as of December 31, 2011 has been audited by Deloitte S.L., an independent registered public accounting firm, as stated in their report which follows below.
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 internal control over financial reporting of BANCO BILBAO VIZCAYA ARGENTARIA, S.A. (the “Company”) and subsidiaries composing the BANCO BILBAO VIZCAYA ARGENTARIA Group (the “Group”—Note 3) as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
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with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2011 of the Group and our report dated April 26, 2012 expressed an unqualified opinion on those consolidated financial statements.
/s/DELOITTE, S.L.
Madrid—Spain
April 26, 2012
Changes in Internal Control Over Financial Reporting
There has been no change in BBVA’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
The charter for our Audit and Compliance Committee 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 the banking regulators, and we have determined that Mr. José Luis Palao García Suelto, the Chairman of the Audit and Compliance Committee, has such experience and knowledge and is an “audit committee financial expert” as such term is defined by the regulations of the Securities and Exchange Commission issued pursuant to Section 407 of the Sarbanes-Oxley Act of 2002. Mr. Palao is independent within the meaning of the New York Stock Exchange listing standards.
In addition, we believe that the remaining members of the Audit and Compliance Committee have an understanding of applicable generally accepted accounting principles, 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
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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.
BBVA’s Code of Ethics and Conduct applies, among others, 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 in 2011. BBVA’s Code of Ethics and Conduct can be found on its website at www.bbva.com.
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)
Aggregate fees billed for each of the last two fiscal years for professional services rendered by Deloitte, S.L. for the audit of BBVA’s annual financial statements or services that are normally provided by Deloitte, S.L. in connection with statutory and regulatory filings or engagements for those fiscal years. Total audit fees billed by Deloitte, S.L. and its worldwide affiliates, were €17.6 million and€16.4 million in 2011 and 2010, respectively.
Aggregate fees billed in each of the last two fiscal years for assurance and related services by Deloitte, S.L. that are reasonably related to the performance of the audit or review of BBVA’s financial statements and are not reported under (1) above.
Aggregate fees billed in each of the last two fiscal years for professional services rendered by Deloitte, S.L. for tax compliance, tax advice, and tax planning.
Aggregate fees billed in each of the last two fiscal years for products and services provided by Deloitte, S.L. other than the services reported in (1), (2) and (3) above. Services in this category consisted primarily of consultancy and implementation of new regulation.
The Audit and Compliance Committee’s Pre-Approval Policies and Procedures
In order to assist in ensuring the independence of our external auditor, the regulations 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.
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The pre-approval policy is as follows:
The hiring of BBVA’s external auditor or any of its affiliates is prohibited, unless there is no other firm available to provide the needed services at a comparable cost and that could deliver a similar level of quality.
In the event that there is no other firm available to provide needed services at a comparable cost and delivering a similar level of quality, the external auditor (or any of its affiliates) may be hired to perform such services, but only with the pre-approval of the Audit and Compliance Committee.
The Chairman of the Audit and Compliance Committee has been delegated the authority to approve the hiring of BBVA’s external auditor (or any of its affiliates). In such an event, however, the Chairman would be required to inform the Audit and Compliance Committee of such decision at the Committee’s next meeting.
The hiring of the external auditor for any of BBVA’s subsidiaries must also be pre-approved by the Audit and Compliance Committee.
Agreements entered into prior to May 6, 2003 between BBVA or any of its subsidiaries and any of their respective external auditors, required the approval of the Audit and Compliance Committee in the event that services provided under such agreements continued after May 6, 2004.
January 1 to January 31
February 1 to February 28
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 2011, we sold a total of 664,643,557 shares for an average price of €7.53 per share.
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During the years ended December 31, 2011, 2010 and 2009 and through the date of this Annual Report, the principal independent accountant engaged to audit our financial statements, Deloitte S.L., has not resigned, indicated that it has declined to stand for re-election after the completion of its current audit or been dismissed. For each of the years ended December 31, 2011, 2010 and 2009, Deloitte S.L. has not expressed reliance on another accountant or accounting firm in its report on our audited annual accounts for such periods.
Compliance with NYSE Listing Standards on Corporate Governance
On November 4, 2003, the SEC approved 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) 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.
Subject to certain exceptions not applicable to us and except as indicated below, 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 for the time being any definition of what constitutes independence for the purpose of board or committee membership or otherwise.
With respect to board committees, pursuant to RD 771/2011, the Bank of Spain will determine which credit entities should have a Compensation Committee, taking into account, among other things, their size, internal organization and the complexity of their activities. The Chairman and the members of the Compensation Committee, if any, will be members of the Board of Directors with no executive functions. In addition, according to the Securities Market Act, listed companies should have an Audit Committee and at least one of its members must be an independent director.
Moreover, pursuant to certain non-binding recommendations applicable to listed companies in Spain, the Audit and Compliance Committee and the Compensation and Appointment Committees of such companies should be composed of a majority of non-executive directors and chaired by an independent director. These recommendations also contain a definition of what constitutes independence for the purpose of board or committee membership.
Pursuant to article 1 of our Board regulations BBVA considers that independent directors are those who fulfill the requirements described below:
Independent directors are external directors appointed for their personal and professional background who can pursue their duties without being constrained by their relations with the Company, its significant shareholders or its executives.
Independent directors may not:
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“Business relationships” shall mean relationships as provider of goods and/or services, including financial, advisory and/or consultancy services.
Those who are merely trustees on a foundation receiving donations shall not be ineligible under this section.
Fall within the cases described under letters a), e), f) or g) of this section, with respect to any significant shareholder or shareholder represented on the Board. In cases of family relationships described under letter g), the limitation shall not only apply to the shareholder, but also to the directors it nominates for the Company’s Board.
Our Board of Directors has a large number of non-executive directors and eleven out of the 14 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, our Board of Directors has an Appointments Committee and a Compensation Committee which are composed mainly 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
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presence of our executive directors anytime the Audit and Compliance Committee or the Appointments Committee and the Compensation Committee meet, since these Committees are comprised solely of non- executive 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.
Code of Ethics
The NYSE listing standards require U.S. companies to adopt a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. For information with respect to BBVA’s code of business conduct and ethics see “Item 16B. Code of Ethics”.
We have responded to Item 18 in lieu of responding to this Item.
Reference is made to Item 19 for a list of all financial statements filed as a part of this Annual Report.
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ExhibitNumber
Description
Confidential treatment has been requested with respect to certain portions of this agreement. Confidential portions have been redacted and separately filed with the SEC.
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/ RICARDO GOMEZ BARREDO
Name:
Title:
Date April 26, 2012
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CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
• Consolidated balance sheets
• Consolidated income statements
• Consolidated statements of recognized income and expenses
• Consolidated statements of changes in equity
• Consolidated statements of cash flows
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Introduction, basis for presentation of the consolidated financial statements and internal control of financial information
2. Principles of consolidation, accounting policies and measurement bases applied and recent IFRS pronouncements
3. Banco Bilbao Vizcaya Argentaria Group
4. Allocation of earnings and the new system of shareholder remuneration
5. Earnings per share
6. Bases and methodology for business segment reporting
7. Risk management
8. Fair value of financial instruments
9. Cash and balances with central banks
10. Financial assets and liabilities held for trading
11. Other financial assets and liabilities at fair value through profit or loss
12. Available-for-sale financial assets
13. Loans and receivables
14. Held-to-maturity investments
15. Hedging derivatives (receivable and payable) and Fair-value changes of the hedged items in portfolio hedges of interest-rate risk
16. Non-current assets held for sale and liabilities associated with non-current assets held for sale
17. Investments in entities accounted for using the equity method
18. Reinsurance assets
19. Tangible assets
20. Intangible assets
21. Tax assets and liabilities
22. Other assets and liabilities
23. Financial liabilities at amortized cost
24. Liabilities under insurance contracts
25. Provisions
26. Pensions and other post-employment commitments
27. Common stock
28. Share premium
29. Reserves
30. Treasury stock
31. Valuation adjustments
32. Non-controlling interests
33. Capital base and capital management
34. Contingent risks and commitments
35. Assets assigned to other own and third-party obligations
36. Other contingent assets and liabilities
37. Purchase and sale commitments and future payment obligations
38. Transactions for the account of third parties
39. Interest Income and Expense and Similar Items
40. Dividend income
41. Share of profit or loss of entities accounted for using the equity method
42. Fee and commission income
43. Fee and commission expenses
44. Net gains (losses) on financial assets and liabilities (net)
45. Other operating income and expenses
46. Administration costs
47. Depreciation and amortization
48. Provisions (net)
49. Impairment losses on financial assets (net)
50. Impairment losses on other assets (net)
51. Gains (losses) on derecognized assets not classified as non-current assets held for sale
52. Gains (losses) on non-current assets held for sale not classified as discontinued transactions
53. Consolidated statements of cash flows
54. Accountant fees and services
55. Related party transactions
56. Remuneration and other benefits of the Board of Directors and Members of the Bank’s Management Committee
57. Detail of the Directors’ holdings in companies with similar business activities
58. Other information
59. Subsequent events
APPENDICES
APPENDIX I
APPENDIX II
APPENDIX III
APPENDIX IV
APPENDIX V
APPENDIX VI
APPENDIX VII
APPENDIX VIII
APPENDIX IX
APPENDIX X
APPENDIX XI
Glossary
APPENDIX XII
Additional disclosure required by the Regulation S-X
We have audited the accompanying consolidated balance sheets of BANCO BILBAO VIZCAYA ARGENTARIA, S.A. (the “Company”) and subsidiaries composing the BANCO BILBAO VIZCAYA ARGENTARIA Group (the “Group” – Note 3) as of December 31, 2011, 2010 and 2009, and the related consolidated income statements, statements of recognized income and expense, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the controlling Company’s Directors. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of BANCO BILBAO VIZCAYA ARGENTARIA, S.A. and subsidiaries composing the BANCO BILBAO VIZCAYA ARGENTARIA Group as of December 31, 2011, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with the International Financial Reporting Standards, as issued by the International Accounting Standards Boards (“IFRS – IASB”).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 26, 2012 expressed an unqualified opinion on the Group’s internal control over financial reporting.
DELOITTE, S.L.
Madrid – Spain
F-1
Consolidated balance sheets as of December 31, 2011, 2010 and 2009
CASH AND BALANCES WITH CENTRAL BANKS
FINANCIAL ASSETS HELD FOR TRADING
OTHER FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS
AVAILABLE-FOR-SALE FINANCIAL ASSETS
LOANS AND RECEIVABLES
HELD-TO-MATURITY INVESTMENTS
FAIR VALUE CHANGES OF THE HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK
HEDGING DERIVATIVES
NON-CURRENT ASSETS HELD FOR SALE
INVESTMENTS IN ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD
Associates
Jointly controlled entities
INSURANCE CONTRACTS LINKED TO PENSIONS
REINSURANCE ASSETS
TANGIBLE ASSETS
Property, plants and equipment
For own use
Other assets leased out under an operating lease
Investment properties
INTANGIBLE ASSETS
Goodwill
Other intangible assets
TAX ASSETS
Current
Deferred
OTHER ASSETS
Inventories
TOTAL ASSETS
The accompanying Notes 1 to 59 and Appendices I to XII are an integral part of the consolidated balance sheet as of December 31, 2011.
F-2
LIABILITIES AND EQUITY
FINANCIAL LIABILITIES HELD FOR TRADING
OTHER FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS
FINANCIAL LIABILITIES AT AMORTIZED COST
LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE
LIABILITIES UNDER INSURANCE CONTRACTS
PROVISIONS
Provisions for pensions and similar obligations
Provisions for taxes and other legal contingencies
Provisions for contingent risks and commitments
Other provisions
TAX LIABILITIES
OTHER LIABILITIES
TOTAL LIABILITIES
F-3
STOCKHOLDERS’ FUNDS
Common Stock
Issued
Unpaid and uncalled (-)
Share premium
Reserves
Accumulated reserves (losses)
Reserves (losses) of entities accounted for using the equity method
Other equity instruments
Equity component of compound financial instruments
Less: Treasury stock
Income attributed to the parent company
Less: Dividends and remuneration
VALUATION ADJUSTMENTS
Cash flow hedging
Hedging of net investment in foreign transactions
Exchange differences
Non-current assets held-for-sale
Entities accounted for using the equity method
Other valuation adjustments
NON-CONTROLLING INTEREST
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
MEMORANDUM ITEM
CONTINGENT RISKS
CONTINGENT COMMITMENTS
F-4
Consolidated income statements for the years ended December 31, 2011, 2010 and 2009
INTEREST AND SIMILAR INCOME
INTEREST AND SIMILAR EXPENSES
NET INTEREST INCOME
DIVIDEND INCOME
SHARE OF PROFIT OR LOSS OF ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD
FEE AND COMMISSION INCOME
FEE AND COMMISSION EXPENSES
NET GAINS (LOSSES) ON FINANCIAL ASSETS AND LIABILITIES
Financial instruments held for trading
Other financial instruments at fair value through profit or loss
Other financial instruments not at fair value through profit or loss
EXCHANGE DIFFERENCES (NET)
OTHER OPERATING INCOME
Income on insurance and reinsurance contracts
Financial income from non-financial services
Rest of other operating income
OTHER OPERATING EXPENSES
Expenses on insurance and reinsurance contracts
Changes in inventories
Rest of other operating expenses
GROSS INCOME
ADMINISTRATION COSTS
DEPRECIATION AND AMORTIZATION
PROVISIONS (NET)
IMPAIRMENT LOSSES ON FINANCIAL ASSETS (NET)
NET OPERATING INCOME
F-5
IMPAIRMENT LOSSES ON OTHER ASSETS (NET)
Goodwill and other intangible assets
GAINS (LOSSES) ON DERECOGNIZED ASSETS NOT CLASSIFIED AS NON-CURRENT ASSETS HELD FOR SALE
NEGATIVE GOODWILL
GAINS (LOSSES) IN NON-CURRENT ASSETS HELD FOR SALE NOT CLASSIFIED AS DISCONTINUED OPERATIONS
INCOME BEFORE TAX
INCOME TAX
INCOME FROM CONTINUING TRANSACTIONS
INCOME FROM DISCONTINUED TRANSACTIONS (NET)
NET INCOME
Net Income attributed to parent company
Basic earnings per share
Diluted earnings per share
The accompanying Notes 1 to 59 and Appendices I to XII are an integral part of the consolidated income statement for the year ending December 31, 2011.
F-6
Consolidated statements of recognized income and expenses for the years ended
December 31, 2011, 2010 and 2009
NET INCOME RECOGNIZED IN INCOME STATEMENT
OTHER RECOGNIZED INCOME (EXPENSES)
Valuation gains/(losses)
Amounts removed to income statement
Reclassifications
Amounts removed to the initial carrying amount of the hedged items
Non-current assets held for sale
Actuarial gains and losses in post-employment plans
Rest of recognized income and expenses
TOTAL RECOGNIZED INCOME/EXPENSES
Attributed to the parent company
Attributed to minority interests
The accompanying Notes 1 to 59 and Appendices I to XII are an integral part of the consolidated statement of recognized income and expenses for the year ended December 31, 2011.
F-7
Consolidated statements of changes in equity for the years ended December 31, 2011, 2010 and 2009
Balances as of January 1, 2011
Effect of changes in accounting policies
Effect of correction of errors
Adjusted initial balance
Total income/expense recognized
Other changes in equity
Common stock increase
Common stock reduction
Conversion of financial liabilities into capital
Increase of other equity instruments
Reclassification of financial liabilities to other equity instruments
Reclassification of other equity instruments to financial liabilities
Dividend distribution
Transactions including treasury stock and other equity instruments (net)
Transfers between total equity entries
Increase/Reduction due to business combinations
Payments with equity instruments
Rest of increases/reductions in total equity
Acquisition of the free allotment rights
Balances as of December 31, 2011
The accompanying Notes 1 to 59 and Appendices I to XII are an integral part of the consolidated statement of changes in equity for the year ended December 31, 2011.
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Balances as of January 1, 2010
Balances as of December 31, 2010
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Balances as of January 1, 2009
Balances as of December 31, 2009
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Consolidated statements of cash flows for the years ended December 31, 2011, 2010 and 2009
CASH FLOW FROM OPERATING ACTIVITIES (1)
Net income for the year
Adjustments to obtain the cash flow from operating activities:
Other adjustments
Net increase/decrease in operating assets
Other operating assets
Net increase/decrease in operating liabilities
Financial liabilities held for trading
Other financial liabilities designated at fair value through profit or loss
Financial liabilities at amortized cost
Other operating liabilities
Collection/Payments for income tax
CASH FLOWS FROM INVESTING ACTIVITIES (2)
Investment
Tangible assets
Intangible assets
Investments
Subsidiaries and other business units
Non-current assets held for sale and associated liabilities
Other settlements related to investing activities
Divestments
Other collections related to investing activities
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Consolidated statements of cash flows for the years ended
CASH FLOWS FROM FINANCING ACTIVITIES (3)
Common stock amortization
Treasury stock acquisition
Other items relating to financing activities
Treasury stock disposal
EFFECT OF EXCHANGE RATE CHANGES (4)
NET INCREASE/DECREASE IN CASH OR CASH EQUIVALENTS (1+2+3+4)
CASH OR CASH EQUIVALENTS AT BEGINNING OF THE YEAR
CASH OR CASH EQUIVALENTS AT END OF THE YEAR
COMPONENTS OF CASH AND EQUIVALENT AT END OF THE YEAR
Cash
Balance of cash equivalent in central banks
Other financial assets
Less: Bank overdraft refundable on demand
TOTAL CASH OR CASH EQUIVALENTS AT END OF THE YEAR
Held by consolidated subsidiaries but not available for the Group
The accompanying Notes 1 to 59 and Appendices I to XII are an integral part of the consolidated statement of cash flows for the year ended December 31, 2011.
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Notes to consolidated income statements for the year ended
1.1 Introduction
Banco Bilbao Vizcaya Argentaria, S.A. (hereinafter “the Bank” or “BBVA”) is a private-law entity subject to the laws and regulations governing banking entities operating in Spain. It carries out its activity through branches and agencies across the country and abroad.
The Bylaws and other public information are available for consultation at the Bank’s registered address (Plaza San Nicolás, 4 Bilbao).
In addition to the transactions it carries out directly, the Bank heads a group of subsidiaries, jointly-controlled and associated entities which perform a wide range of activities and which together with the Bank constitute the Banco Bilbao Vizcaya Argentaria Group (hereinafter, “the Group” or “the BBVA Group”). In addition to its own individual financial statements, the Bank is therefore obliged to prepare the Group’s consolidated financial statements.
As of December 31, 2011, the BBVA Group was made up of 293 fully consolidated and 27 proportionately consolidated companies, as well as 73 companies consolidated using the equity method (see Notes 3 and 17 and Appendices II to VII).
The BBVA Group’s consolidated financial statements for the years ending December 31, 2010 and 2009 were approved by the shareholders at the Bank’s Annual General Meetings “AGM” held on March 11, 2011 and March 12, 2010, respectively.
The 2011 consolidated financial statements of the Group and the 2011 financial statements of the Bank have been approved by the shareholders at the AGM held on March 16, 2012.
1.2 Basis for the presentation of the consolidated financial statements
The BBVA Group’s consolidated financial statements are presented in accordance with the International Financial Reporting Standards endorsed by the European Union (EU-IFRS) required to be applied under the Bank of Spain Circular 4/2004, dated December 22 (and as amended thereafter) and in compliance with IFRS-IASB. This Bank of Spain Circular is the regulation that implements and adapts the EU-IFRS for Spanish banks.
The BBVA Group’s consolidated financial statements for the year ended December 31, 2011, 2010 and 2009 were prepared by applying the principles of consolidation, accounting policies and valuation criteria described in Note 2, so that they present fairly the Group’s consolidated equity and financial position as of December 31, 2011, 2010 and 2009 together with the consolidated results of its operations and cash flows generated during 2011, 2010 and 2009.
These consolidated financial statements were prepared on the basis of the accounting records kept by the Bank and each of the other entities in the Group. However, they include the adjustments and reclassifications required to harmonize the accounting policies and valuation criteria used by most of the Group (see Note 2.2).
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All obligatory accounting standards and valuation criteria with a significant effect in the consolidated financial statements were applied in their preparation.
The amounts reflected in the accompanying consolidated financial statements are presented in millions of euros, unless it is more convenient to use smaller units. Some items that appear without a total in these consolidated financial statements do so because of the size of the units used. Also, in presenting amounts in millions of euros, the accounting balances have been rounded up or down. It is therefore possible that the amounts appearing in some tables are not the exact arithmetical sum of their component figures.
The percentage changes in amounts have been calculated using figures expressed in thousands of euros.
1.3 Comparative information
As mentioned in Note 6, the BBVA Group’s business areas were redefined in 2011. This involved changes to the structure current in 2010 and 2009. In order to make it easier to compare information against these years, the information for 2010 and 2009 has been reworked in accordance with the criteria used in 2011, as established by IFRS 8 “Operating Segments”.
1.4 Seasonal nature of income and expenses
The nature of the most significant operations carried out by the BBVA Group’s entities is mainly related to traditional activities carried out by financial institutions, which are not significantly affected by seasonal factors.
1.5 Responsibility for the information and for the estimates made
The information contained in the BBVA Group’s consolidated financial statements is the responsibility of the Bank’s directors, who at times have to make estimates to determine the balances of some assets, liabilities, income, expenses and commitments recorded in them. These estimates relate mainly to the following:
Impairment on certain financial assets (see Notes 7, 8, 12, 13, 14 and 17).
The assumptions used to quantify certain provisions (see Note 25) and for the actuarial calculation of post-employment benefit liabilities and commitments (see Note 26).
The useful life and impairment losses of tangible and intangible assets (see Notes 16, 19, 20 and 22).
The valuation of goodwill arising on consolidation (see Notes 17 and 20).
The fair value of certain unlisted financial assets and liabilities in organized markets (see Notes 7, 8, 10, 11, 12 and 15).
Although these estimates were made on the basis of the best information available as of December 31, 2011 on the events analyzed, future events may make it necessary to modify them (either up or down) over the coming years. This would be done in accordance with applicable regulations and prospectively, recording the effects of the changes in the estimates in the corresponding consolidated income statements.
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1.6 Control of the BBVA Group’s financial reporting
The financial information prepared by the BBVA Group is subject to a system of internal control (Internal Control over Financial Reporting or ICFR). Its aim is to provide reasonable security with respect to its reliability and integrity, and to ensure that the transactions carried out and processed use the criteria established by the Group’s management and comply with applicable laws and regulations.
The ICFR was developed by the Group’s management in accordance with international standards established by the Committee of Sponsoring Organizations of the Treadway Commission (hereinafter, “COSO). This stipulates five components that must form the basis of the effectiveness and efficiency of systems of internal control:
Assessment of all of the risks that could arise during the preparation of financial information.
Design the necessary controls to mitigate the most critical risks.
Monitoring of the controls to ensure they perform correctly and are effective over time.
Establishment of an appropriate system of information flows to detect and report system weaknesses or flaws.
Establishment of a suitable control environment to track all of these activities.
The ICFR is a dynamic model that evolves continuously over time to reflect the reality of the Group’s business at any time, together with the risks affecting it and the controls designed to mitigate these risks. It is subject to continuous evaluation by the internal control units.
The internal control units within each company comply with a common and standard methodology issued by the corporate internal control units, which also perform a supervisory role over them, as can be seen from the following diagram:
As well as the evaluation that the Internal Control Units performs, ICFR Model is subject to regular evaluations by the Internal Audit Department and is supervised by the Group’s Audit and Compliance Committee.
As a foreign private issuer in the United States, the BBVA Group submits Annual Reports on Form 20F to the Securities and Exchange Commission (SEC) and thus complies with the requirements pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.
In the evaluation by the Internal Audit Department and the Internal Control Units, no weaknesses were detected that could have a material or significant impact on the BBVA Group consolidated financial statements for the year 2011.
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1.7 Mortgage market policies and procedures
The additional disclosures required by Bank of Spain Circular 5/2011, applying Royal Decree 716/2009, dated April 24, 2009 (which developed certain aspects of Law 2/1981, dated 25 March, on the regulation of the mortgage market and other mortgage and financial market regulations) are set out in more detail in the Bank’s individual financial statements for the year ended December 31, 2011.
The Glossary (Appendix XI) includes the definition of some of the financial and economic terms used in Note 2 and subsequent Notes.
2.1 Principles of consolidation
In terms of its consolidation, the BBVA Group is made up of three types of companies: subsidiaries, jointly controlled entities and associates.
Subsidiaries: Subsidiaries are those companies which the Group has the capacity to control. (See the Glossary, Appendix XI, for a more detailed definition of subsidiaries and control).
The financial statements of the subsidiaries are consolidated with those of the Bank using the global integration method.
The share of minority interests from subsidiaries in the Group’s consolidated equity is presented under the heading “Non-controlling interests” in the consolidated balance sheets. Their share in the profit or loss for the year is presented under the heading “Net income attributed to non-controlling interests” in the accompanying consolidated income statement (see Note 32).
Note 3 includes information related to the main subsidiaries in the Group as of December 31, 2011. Appendix II includes other significant information on these companies.
Jointly controlled entities: These are entities that are not dependent on a third party, but meet all the conditions for being considered a “joint business” (see the definition of jointly controlled entities in Appendix XI, Glossary). The BBVA Group has applied the following criteria in relation to the consolidation of its jointly controlled entities:
Jointly-controlled financial entity: Since it is a financial entity, the best way of reflecting its activities within the Group’s consolidated financial statements is considered to be the proportionate method of consolidation.
As of December 31, 2011, 2010 and 2009, the proportionately consolidated jointly controlled financial entities increased the main figures in the BBVA Group’s consolidated financial statements as shown in the table below:
Contribution to the Group by Entities Accounted for
Under the Proportionate Method
Assets
Liabilities
Increases are due basically to Garanti
As of December 31, 2011, the most significant contribution of jointly controlled entities under the proportionate consolidation method is from Garanti (see Note 3). No additional information is presented with respect to the other entities as the holdings in these cases are not significant.
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Appendix III shows the main figures for jointly controlled entities consolidated under the proportionate method.
Jointly-controlled non-financial entity. The effect of distributing the balance sheet and income statement amounts belonging to jointly controlled non-financial entities in the Group’s consolidated financial statements would distort the information provided to investors. It is therefore considered more appropriate to reflect these investments in the Group’s consolidated financial statements using the equity method.
Appendix IV shows the main figures for jointly controlled entities consolidated using the equity method. Note 17 details the impact that application of the proportionate consolidation method on these entities would have had on the consolidated balance sheet and income statement.
Associate entities: Associates are companies in which the Group is able to exercise significant influence, without having total or joint control. Significant influence is deemed to exist when the Group owns 20% or more of the voting rights of an investee directly or indirectly.
However, certain entities in which the Group owns 20% or more of the voting rights are not included as Group associates, since the Group does not have the capacity to exercise significant influence over these entities. Investments in these entities, which do not represent significant amounts for the Group, are classified as “Available-for-sale financial assets.”
In contrast, some investments in entities in which the Group holds less than 20% of the voting rights are accounted for as Group associates, as the Group is considered to have the power to exercise significant influence over these entities.
Appendix IV shows the most significant information related to the associates (see Note 17), which are consolidated using the equity method.
In all cases, results of subsidiaries acquired by the BBVA Group in a particular year are included taking into account only the period from the date of acquisition to year-end. Similarly, the results of companies disposed of during any year are included only taking into account the period from the start of the year to the date of disposal.
Individual financial statements –
The separate financial statements of the parent company of the Group (Banco Bilbao Vizcaya Argentaria, S.A.) are prepared under Spanish regulations (Circular 4/2004 of the Bank of Spain, and subsequent amendments). The Bank uses the cost method to account for its investment in subsidiaries, associates and jointly controlled companies, as permitted by IAS 27.
Appendix I shows BBVA’s individual financial statements as of December 31, 2011 and 2010.
2.2 Accounting policies and valuation criteria applied
The accounting standards and policies and the valuation criteria applied in preparing these consolidated financial statements may differ from those used by some of the entities in the BBVA Group. For this reason, the necessary adjustments and reclassifications have been introduced in the consolidation process to standardize these principles and criteria and comply with the EU-IFRS required to be applied under the Bank of Spain Circular 4/2004, of December 22, 2004 and in compliance with IFRS-IASB.
The accounting standards and policies and valuation criteria used in preparing these consolidated financial statements are as follows:
2.2.1 Financial Instruments
Measurement of financial instruments and recognition of changes in subsequent fair value
All financial instruments are initially accounted for at fair value which, unless there is evidence to the contrary, shall be the transaction price.
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All the changes in the financial instruments, except in trading derivatives, arising from the accrual of interests and similar items are recognized under the headings “Interest and similar income” or “Interest and similar expenses”, as appropriate, in the accompanying consolidated income statement for the year in which the accrual took place (see Note 39). The dividends paid from other companies are recognized under the heading “Dividend income” in the accompanying consolidated income statement for the year in which the right to receive them arises (see Note 40).
The changes in fair value after the initial recognition, for reasons other than those mentioned in the preceding paragraph, are treated as described below, according to the categories of financial assets and liabilities:
“Financial assets held for trading” and “Other financial assets and liabilities designated at fair value through profit or loss”
The assets and liabilities recognized in these chapters of the consolidated balance sheets are measured at fair value and changes in value (gains or losses) are recognized as their net value under the heading “Net gains (losses) on financial assets and liabilities” in the accompanying consolidated income statements (see Note 44). However, changes resulting from variations in foreign exchange rates are recognized under the heading “Exchange differences (net)” in the accompanying consolidated income statements.
“Available-for-sale financial assets”
Assets recognized under these headings in the consolidated balance sheets are measured at their fair value. Subsequent changes in this measurement (gains or losses) are recognized temporarily for their amount net of tax effect, under the heading “Valuation adjustments – Available-for-sale financial assets” in the consolidated balance sheets.
Changes in the value of non-monetary items by changes in foreign exchange rates are recognized temporarily under the heading “Valuation adjustments – Exchange differences” in the accompanying consolidated balance sheets. Changes in foreign exchange rates resulting from monetary items are recognized under the heading “Exchange differences (net)” in the accompanying consolidated income statements.
The amounts recognized under the headings “Valuation adjustments – Available-for-sale financial assets” and “Valuation adjustments – Exchange differences” continue to form part of the Group’s consolidated equity until the asset is derecognized from the consolidated balance sheet or until an impairment loss is recognized in the financial instrument in question. If these assets are sold, these amounts are derecognized and entered under the headings “Net gains (losses) on financial assets and liabilities” or “Exchange differences (net)”, as appropriate, in the consolidated income statement for the year in which they are derecognized.
The gains from sales of other equity instruments considered strategic investments registered under “Available-for-sale financial assets” are recognized under the heading “Gains (losses) in non-current assets held-for-sale not classified as discontinued operations” in the consolidated income statement, even if they had not been classified in a previous balance sheet as non-current assets held for sale (see Note 52).
The net impairment losses in “Available-for-sale financial assets” over the year are recognized under the heading “Impairment losses on financial assets (net) – Other financial instruments not at fair value through profit or loss” (see Note 49) in the consolidated income statements for that year.
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“Loans and receivables”, “Held-to-maturity investments” and “Financial liabilities at amortized cost”
Assets and liabilities recognized under these headings in the accompanying consolidated balance sheets are measured at “amortized cost” using the “effective interest rate” method. This is because the consolidated entities intend to hold such financial instruments to maturity.
Net impairment losses of assets recognized under these headings arising in a particular year are recognized under the heading “Impairment losses on financial assets (net) – Loans and receivables” or “Impairment losses on financial assets (net) – Other financial instruments not valued at fair value through profit or loss” (see Note 49) in the consolidated income statement for that year.
“Hedging derivatives” and “Fair value changes of the hedged items in portfolio hedges of interest-rate risk”
Assets and liabilities recognized under these headings in the accompanying consolidated balance sheets are measured at fair value.
Changes produced subsequent to the designation of the hedging relationship in the measurement of financial instruments designated as hedged items as well as financial instruments designated as hedge accounting instruments are recognized as follows:
In fair value hedges, the changes in the fair value of the derivative and the hedged item attributable to the hedged risk are recognized under the heading “Net gains (losses) on financial assets and liabilities” in the consolidated income statement, with a balancing item under the headings where hedging items (“Hedging derivatives”) and the hedged items are recognized, as applicable.
In fair value hedges of interest rate risk of a portfolio of financial instruments (portfolio-hedges), the gains or losses that arise in the measurement of the hedging instrument are recognized in the consolidated income statement, and the gains or losses that arise from the change in the fair value of the hedged item (attributable to the hedged risk) are recognized in the consolidated income statement, using, as a balancing item, the headings “Fair value changes of the hedged items in portfolio hedges of interest rate risk” in the consolidated balance sheets, as applicable.
In cash flow hedges, the gain or loss on the hedging instruments relating to the effective portion are recognized temporarily under the heading “Valuation adjustments – Cash flow hedging” in the consolidated balance sheets. These differences are recognized in the accompanying consolidated income statement at the time when the gain or loss in the hedged instrument affects profit or loss, when the forecast transaction is executed or at the maturity date of the hedged item. Almost all of the hedges used by the Group are for interest-rate risks. Therefore, the valuation changes are recognized under the headings “Interest and similar income” or “Interest and similar expenses” as appropriate, in the accompanying consolidated income statement (see Note 39).
Differences in the measurement of the hedging items corresponding to the ineffective portions of cash flow hedges are recognized directly in the heading “Net gains (losses) on financial assets and liabilities” in the consolidated income statement.
In the hedges of net investments in foreign operations, the differences produced in the effective portions of hedging items are recognized temporarily under the heading “Valuation adjustments – Hedging of net investments in foreign transactions” in the consolidated balance sheets. These differences in valuation are recognized under the heading “Exchange differences (net)” in the consolidated income statement when the investment in a foreign operation is disposed of or derecognized.
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Other financial instruments
The following exceptions are applicable with respect to the above general criteria:
Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those instruments as their underlying asset and are settled by delivery of those instruments remain in the consolidated balance sheet at acquisition cost; this may be adjusted, where appropriate, for any impairment loss.
Valuation adjustments arising from financial instruments classified at the consolidated balance sheet date as non-current assets held for sale are recognized with a balancing entry under the heading “Valuation adjustments – Non-current assets held for sale” in the accompanying consolidated balance sheets.
Impairment losses on financial assets –
Definition of impaired financial assets
A financial asset is considered to be impaired – and therefore its carrying amount is adjusted to reflect the effect of impairment – when there is objective evidence that events have occurred which:
In the case of debt instruments (loans and debt securities), give rise to an adverse impact on the future cash flows that were estimated at the time the transaction was arranged. So they are considered impaired when there are reasonable doubts that the balances will be recovered in full and/or the related interest will be collected for the amounts and on the dates initially agreed.
In the case of equity instruments, mean that their carrying amount may not be fully recovered.
As a general rule, the carrying amount of impaired financial instruments is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes known. The recoveries of previously recognized impairment losses are registered, if appropriate, in the consolidated income statement for the year in which the impairment is reversed or reduced, with an exception: any recovery of previously recognized impairment losses for an investment in an equity instrument classified as financial assets available for sale is not recognized through consolidated financial statements, but under the heading “Valuation Adjustments – Available-for-sale financial assets” in the consolidated balance sheet.
In general, amounts collected in relation to impaired loans and receivables are used to recognize the related accrued interest and any excess amount is used to reduce the principal not yet paid.
When the recovery of any recognized amount is considered to be remote, this amount is written-off on the consolidated balance sheet, without prejudice to any actions that may be taken in order to collect the amount until the rights extinguish in full either because it is time-barred debt, the debt is forgiven, or other reasons.
We assess the evolution of recognized amounts individually, in the case of significant financial assets and for assets which are not susceptible to being classified in homogeneous groups of instruments with similar risk characteristics, or collectively, in the case of smaller financial assets susceptible to being classified in homogeneous groups.
According to our established policy, the recovery of a recognized amount is considered to be remote and, therefore, removed from our consolidated balance sheet in the following cases:
Any loan (except for those carrying an effective guarantee) of a company in bankruptcy and/or in the last phases of a “concurso de acreedores” (the Spanish equivalent of a Chapter 11 bankruptcy proceeding), and
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Financial assets (bonds, obligations, etc.) whose issuer’s solvency capability has been downgraded in an irrevocable way.
Additionally, loans classified as substandard secured loans are written off within a maximum period of four years from their due date, while substandard unsecured loans (such as commercial and consumer loans, credit cards, etc.) are written off within two years from their due date.
Calculation of impairment on financial assets
The impairment on financial assets is determined by type of instrument and other circumstances that could affected, taking into account the guarantees received by the owners of the financial instruments to assure (in part or in full) the performance of transactions. The BBVA Group recognizes impairment charges directly against the impaired asset when the likelihood of recovery is deemed remote, and uses an offsetting or allowance account when it records non-performing loan provisions for the estimated losses.
Impairment of debt securities measured at amortized cost
The amount of impairment losses of debt securities at amortized cost is measured depending on whether the impairment losses are determined individually or collectively.
Impairment losses determined individually
The amount of the impairment losses incurred on these instruments relates to the positive difference between their respective carrying amounts and the present values of their expected future cash flows. These cash flows are discounted using the original effective interest rate. If a financial instrument has a variable interest rate, the discount rate for measuring any impairment loss is the current effective rate determined under the contract.
As an exception to the rule described above, the market value of quoted debt instruments is deemed to be a fair estimate of the present value of their future cash flows.
The following is to be taken into consideration when estimating the future cash flows of debt instruments:
All the amounts that are expected to be recovered over the residual life of the instrument; including, where appropriate, those which may result from the collaterals and other credit enhancements provided for the instrument (after deducting the costs required for foreclosure and subsequent sale). Impairment losses include an estimate for the possibility of collecting accrued, past-due and uncollected interest.
The various types of risk to which each instrument is subject.
The circumstances in which collections will foreseeably be made.
In respect to impairment losses resulting from the materialization of insolvency risk of the obligors (credit risk), a debt instrument is impaired:
When there is evidence of a reduction in the obligor’s capacity to pay, whether manifestly by default or for other reasons; and/or
When country-risk materializes, understood as the common risk among debtors who are resident in a particular country as a result of factors other than normal commercial risk.
The Group has policies, methods and procedures for hedging its credit risk, for insolvency attributable to counterparties and country-risk. These policies, methods and procedures are applied to the arrangement, study and documentation of debt instruments, contingent risks and commitments, as well as the detection of their deterioration and in the calculation of the amounts needed to cover their credit risk.
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Impairment losses determined collectively
The determined collectively losses are calculated by using statistical procedures, and they are deemed equivalent to the portion of losses incurred on the date that the accompanying consolidated financial statements are prepared that has yet to be allocated to specific transactions.
The BBVA Group uses the concept of expected loss to quantify the cost of the credit risk and include it in the calculation of the risk-adjusted return of its transactions. The parameters necessary for its calculation are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models (see Note 33).
These models allow us to estimate the expected loss of the credit risk of each portfolio, in the one-year period after the reporting date, considering the characteristics of the counterparty and the guarantees and collateral associated with the transactions.
Exposure at default (EAD) is the amount of risk exposure at the date of default by the counterparty.
Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction. PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year. The definition of default used includes amounts past due by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty. We assign a PD of 100% where there is a default.
The calculation of the expected loss also takes into account the adjustment to the cycle of the aforementioned factors, especially PD and LGD.
The methodology for determining the allowance for determined collectively losses, the Group seeks to identify the amounts of losses which, although incurred at the reporting date, have not yet been disclosed and which the Group knows, on the basis of historical experience and other specific information, will arise following the reporting date.
The calculation of the not reported incurred loss adjusts the expected loss taking into account two parameters:
The point-in-time parameter is an adjustment to eliminate the through-the-cycle component of the expected loss.
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The loss identification period (LIP) is the time period between the occurrence of a specific impairment event and objective evidence of impairment becoming apparent on an individual basis; in other words, the time between the loss event and the date an entity identified its occurrence.
However, as required by the Bank of Spain, until the Spanish regulatory authority has verified and approved these internal models for the calculation of the allowance for collective losses incurred, these must also be calculated based on the information provided by the Bank of Spain related to the Spanish banking industry.
Country Risk Allowance or Provision
Country risk is understood as the risk associated with customers resident in a specific country due to circumstances other than normal commercial risk. Country risk comprises sovereign risk, transfer risk and other risks arising from international financial activity. On the basis of the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, the BBVA Group classifies the transactions in different groups, assigning to each group the provisions for insolvencies percentages, which are derived from those analyses.
However, due to the dimension of the Group, and to the proactive management of its country risk exposure, the allowances recognized in this connection are not material with respect to the credit loss allowances recognized. As of December 31, 2011, 2010 and 2009, these country risk allowances represent 0.43%, 0.37% and 0.52% of the credit loss allowances recognized of the Group.
Impairment of other debt instruments
The impairment losses on debt securities included in the “Available-for-sale financial asset” portfolio are equal to the positive difference between their acquisition cost (net of any principal repayment), after deducting any impairment loss previously recognized in the consolidated income statement, and their fair value.
When there is objective evidence that the negative differences arising on measurement of these assets are due to impairment, they are no longer considered as “Valuation adjustments – Available-for-sale financial assets” and are recognized in the consolidated income statement.
If all, or part of the impairment losses are subsequently recovered, the amount is recognized in the consolidated income statement for the year in which the recovery occurred.
Impairment of equity instruments
The amount of the impairment in the equity instruments is determined by the category where is recognized:
Equity instruments measured at fair value: The criteria for quantifying and recognizing impairment losses on equity instruments are similar to those for “Debt instruments”, with the exception that any recovery of previously recognized impairment losses for an investment in an equity instrument classified as available for sale is not recognized in the consolidated income statement but under the heading “Valuation adjustments – Available-for-sale financial assets” in the accompanying consolidated balance sheet (see Note 31).
Equity instruments measured at cost: The impairment losses on equity instruments measured at acquisition cost are equal to the difference between their carrying amount and the present value of expected future cash flows discounted at the market rate of return for similar securities. These impairment losses are determined taking into account the equity of the investee (except for valuation adjustments due to cash flow hedges) for the last approved (consolidated) balance sheet, adjusted for the unrealized gains at the measurement date.
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Impairment losses are recognized in the consolidated income statement for the year in which they arise as a direct reduction of the cost of the instrument. These losses may only be reversed subsequently in the event of the sale of these assets.
2.2.2 Transfers and derecognition of financial assets and liabilities
The accounting treatment of transfers of financial assets is determined by the form in which risks and benefits associated with the assets involved are transferred to third parties. Thus the financial assets are only derecognized from the consolidated balance sheet when the cash flows that they generate are extinguished, or when their implicit risks and benefits have been substantially transferred to third parties. In the latter case, the financial asset transferred is derecognized from the consolidated balance sheet, and any right or obligation retained or created as a result of the transfer is simultaneously recognized.
Similarly, financial liabilities are derecognized from the consolidated balance sheet only if their obligations are extinguished or acquired (with a view to subsequent cancellation or renewed placement).
The Group is considered to have transferred substantially all the risks and benefits if such risks and benefits account for the majority of the risks and benefits involved in ownership of the transferred assets. If substantially all the risks and benefits associated with the transferred financial asset are retained:
The transferred financial asset is not derecognized from the consolidated balance sheet and continues to be measured using the same criteria as those used before the transfer.
A financial liability is recognized at the amount equal to the amount received, which is subsequently measured at amortized cost.
In the specific case of securitizations, this liability is recognized under the heading “Financial liabilities at amortized cost – Debt certificates” in the consolidated balance sheets (see Note 23). In securitizations where the risks and benefits of the transferred assets are substantially retained by the BBVA Group, the part acquired by another company in the consolidated Group is deducted from the recognized financial liabilities (securitized bonds), as established by paragraph 42 of IAS 39.
Both the income generated on the transferred (but not derecognized) financial asset and the expenses of the new financial liability continue to be recognized.
The criteria followed with respect to the most common transactions of this type made by the BBVA Group are as follows:
Purchase and sale commitments: Financial instruments sold with a repurchase agreement are not derecognized from the consolidated balance sheets and the amount received from the sale is considered financing from third parties.
Financial instruments acquired with an agreement to subsequently resell them are not recognized in the consolidated balance sheets and the amount paid for the purchase is considered credit given to third parties.
Special purpose vehicles: In those cases where the Group sets up entities, or has a holding in such entities, known as special purpose vehicles, in order to allow its customers access to certain investments, or for transferring risks or for other purposes, in accordance with internal criteria and procedures and with applicable regulations, the Group determines whether control over the entity in question actually exists (as described in Note 2.1), and therefore whether it should be subject to consolidation.
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Among other elements, such methods and procedures take into consideration the risks and profits obtained by the Group, and also take into account all relevant elements, including the guarantees granted or the losses associated with collection of the corresponding assets retained by the Group. Such entities include the so-called asset securitization funds, which are fully consolidated in those cases in which, based on the aforementioned analysis, it is determined that the Group has maintained control.
In the specific instance of the securitization funds to which the BBVA Group’s entities transfer their loan portfolios, the following indications of the existence of control are considered for the purpose of analyzing the possibility of consolidation:
The securitization funds’ activities are undertaken in the name of the entity in accordance with its specific business requirements, with a view to generating benefits or gains from the securitization funds’ operations.
The entity retains a decision-making power with a view to securing most of the gains derived from the securitization funds’ activities or has delegated this power in some kind of “auto-pilot” mechanism (the securitization funds are structured so that all the decisions and activities to be performed are pre-defined at the time of their creation).
The entity is entitled to receive the bulk of the profits from the securitization funds and is accordingly exposed to the risks inherent in their business activities. The entity retains the bulk of the securitization funds’ residual profit.
The entity retains the bulk of the securitization funds’ asset risks.
If there is control based on the preceding guidelines, the securitization funds are integrated into the consolidated Group. If the Group’s exposure to the changes in future net cash flows of securitized assets is not significant, the risks and benefits inherent to them will be deemed to have been substantially transferred. In this case, the Group could derecognize the securitized assets from the consolidated balance sheet.
The BBVA Group has applied the most stringent criteria for determining whether or not it retains the risks and rewards on such assets for all securitizations performed since January 1, 2004. As a result of these analyses, the Group has concluded that none of the securitizations undertaken since that date meet the prerequisites for derecognizing the securitized assets from the consolidated balance sheets (see Note 13.2 and Appendix VII), as it retains substantially all the expected credit losses and possible changes in net cash flows, while retaining the subordinated loans and lines of credit extended by the BBVA Group to these securitization funds.
2.2.3 Financial guarantees
Financial guarantees are considered those contracts that require their issuer to make specific payments to reimburse the holder for a loss incurred when a specific borrower breaches its payment obligations on the terms – whether original or subsequently modified – of a debt instrument, irrespective of the legal form it may take. Financial guarantees may take the form of a deposit, financial guarantee, insurance contract or credit derivative, among others.
In their initial recognition, financial guarantees provided on the liability side of the consolidated balance sheet at fair value, which is generally the present value of the fees, commissions and interest receivable from these contracts over the term thereof, and we simultaneously recognize a credit on the asset side of the consolidated balance sheet for the amount of the fees and commissions received at the inception of the transactions and the amounts receivable at the present value of the fees, commissions and interest outstanding.
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Financial guarantees, irrespective of the guarantor, instrumentation or other circumstances, are reviewed periodically so as to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required for them. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on debt instruments measured at amortized cost (see Note 2.2.1).
The provisions made for financial guarantees considered impaired are recognized under the heading “Provisions – Provisions for contingent risks and commitments” on the liability side in the consolidated balance sheets (see Note 25). These provisions are recognized and reversed with a charge or credit, respectively, to “Provisions (net)” in the consolidated income statements (see Note 48).
Income from guarantee instruments is registered under the heading “Fee and commission income” in the consolidated income statement and is calculated by applying the rate established in the related contract to the nominal amount of the guarantee (see Note 42).
2.2.4 Non-current assets held for sale and liabilities associated with non-current assets held for sale
The heading “Non-current assets held-for-sale” in the consolidated balance sheets includes the carrying amount of financial or non-financial assets that are not part of the BBVA Group’s operating activities. The recovery of this carrying amount is expected to take place through the price obtained on its disposal (see Note 16).
This heading includes individual items and groups of items (“disposal groups”) and disposal groups that form part of a major business unit and are being held for sale as part of a disposal plan (“discontinued operations”). The individual items include the assets received by the subsidiaries from their debtors, and those consolidated under the proportionate consolidated method, in full or partial settlement of the debtors’ payment obligations (assets foreclosed or donated in repayment of debt and recovery of lease finance transactions), unless the Group has decided to make continued use of these assets. The BBVA Group has units that specialize in real estate management and the sale of this type of asset.
Symmetrically, the heading “Liabilities associated with non-current assets held for sale” in the consolidated balance sheets reflects the balances payable arising from disposal groups and discontinued operations.
Non-current assets held for sale are generally measured at fair value less sale costs, or their carrying amount, calculated on the date of their classification within this category, whichever is the lower. Non-current assets held for sale are not depreciated while included under this heading.
The fair value of non-current assets held for sale from foreclosures or recoveries is determined taking in consideration the valuations performed by authorized appraisers in each of the geographical areas in which the assets are located. The BBVA Group applies the rule that these appraisals may not be older than one year, and their age is reduced if there is indication of deterioration in the assets.
Gains and losses generated on the disposal of assets and liabilities classified as non-current held for sale, and related impairment losses and subsequent recoveries, where pertinent, are recognized in “Gains/(losses) on non-current assets held for sale not classified as discontinued operations” in the consolidated income statements (see Note 52). The remaining income and expense items associated with these assets and liabilities are classified within the relevant consolidated income statement headings.
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2.2.5 Tangible assets
Property, plants and equipment for own use: this heading includes the assets under ownership or acquired under lease finance, intended for future or current use by the BBVA Group and that it expects hold for more than one year. It also includes tangible assets received by the consolidated entities in full or part settlement of financial assets representing receivables from third parties and those assets expected to be held for continuing use.
Property, plants and equipment for own use are presented in the consolidated balance sheets at acquisition cost, less any accrued depreciation and, where appropriate, any estimated impairment losses resulting from comparing this net carrying amount of each item with its corresponding recoverable value.
Depreciation is calculated using the straight-line method, on the basis of the acquisition cost of the assets less their residual value; the land on which the buildings and other structures stand is considered to have an indefinite life and is therefore not depreciated.
The tangible asset depreciation charges are recognized in the accompanying consolidated income statements under the heading “Depreciation and amortization” (see Note 47) and are based on the application of the following depreciation rates (determined on the basis of the average years of estimated useful life of the various assets):
Amortization Rates for Tangible Assets
Type of Assets
Buildings for own use
Furniture
Fixtures
Office supplies and hardware
The BBVA Group’s criteria for determining the recoverable amount of these assets, in particular the buildings for own use, is based on up-to-date independent appraisals that are no more than 3-5 years old at most, unless there are other indications of impairment.
At each accounting close, the Group entities analyze whether there are internal or external indicators that a tangible asset may be impaired. When there is evidence of impairment, the entity then analyzes whether this impairment actually exists by comparing the asset’s net carrying amount with its recoverable amount. When the carrying amount exceeds the recoverable amount, the carrying amount is written down to the recoverable amount and depreciation charges going forward are adjusted to reflect the asset’s remaining useful life.
Similarly, if there is any indication that the value of a tangible asset has been recovered, the consolidated entities will estimate the recoverable amounts of the asset and recognize it in the consolidated income statement, recording the reversal of the impairment loss registered in previous years and thus adjusting future depreciation charges. In no circumstances may the reversal of an impairment loss on an asset raise its carrying amount above that which it would have if no impairment losses had been recognized in prior years.
Upkeep and maintenance expenses relating to tangible assets held for own use are recognized as an expense in the year they are incurred and recognized in the consolidated income statements under the heading “Administration costs – General and administrative expenses – Property, fixtures and equipment “ (see Note 46.2).
Other assets leased out under an operating lease: The criteria used to recognize the acquisition cost of assets leased out under operating leases, to calculate their depreciation and their respective estimated useful lives and to record the impairment losses on them, are the same as those described in relation to tangible assets for own use.
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Investment properties: The heading “Tangible assets – Investment properties” in the consolidated balance sheets reflects the net values (purchase cost minus the corresponding accumulated depreciation, and if appropriate, estimated impairment losses) of the land, buildings and other structures that are held either to earn rentals or for capital appreciation through sale and that are neither expected to be sold off in the ordinary course of business nor are destined for own use (see Note 19).
The criteria used to recognize the acquisition cost of investment properties, calculate their depreciation and their respective estimated useful lives and record the impairment losses on them, are the same as those described in relation to tangible assets for continued use.
The BBVA Group’s criteria for determining the recoverable amount of these assets is based on up-to-date independent appraisals that are no more than one year old at most, unless there are other indications of impairment.
2.2.6 Inventories
The balance under the heading “Other assets – Inventories” in the consolidated balance sheets mainly reflects the land and other properties that the BBVA Group’s real estate companies hold for development and sale as part of their real estate development activities (see Note 22).
The cost value of inventories includes the costs incurred for their acquisition and transformation, as well as other direct and indirect costs incurred in giving them their current condition and location.
The cost value of real estate assets accounted for as inventories is comprised of: the acquisition cost of the land, the cost of urban planning and construction, non-recoverable taxes and costs corresponding to construction supervision, coordination and management. The financial expenses incurred during the year increase by the cost value provided that the inventories require more than a year to be in a condition to be sold. With respect to properties purchased from borrowers in distress, which are accounted for as inventory under IAS 2, any balance of the related loans (net of the related allowance for loan losses) are considered part of the cost value of these real estate assets.
Properties purchased from borrowers in distress are measured, at the acquisition date and subsequent period, at the lower of their related loan carrying amount and the fair value of the property acquired less costs to sell. The differences resulting if the fair value less costs to sell is lower than the loan carrying amounts recorded on the balance sheet is charged to the line item “Impairment losses on other assets (net)” in the income statement of the period. In the case of real estate assets accounted for as inventories, the BBVA Group’s criteria for determining their fair value is mainly based on independent appraisals of no more than one year, or less if there are other indications of impairment. The Spanish consolidated entities mainly use the services of valuation and appraisal companies. None of them is linked to the BBVA Group and all are entered in the official Bank of Spain register.
The amount of any inventory valuation adjustment for reasons such as damage, obsolescence, reduction in sale price to its net realizable value, as well as losses for other reasons and, if appropriate, subsequent recoveries of value up to the limit of the initial cost value, are registered under the heading “Impairment losses on other assets (net) – Other assets” in the accompanying consolidated income statements (see Note 50) for the year in which they are incurred.
In the sale transactions, the carrying amount of inventories is derecognized from the consolidated balance sheet and recognized as an expense under the heading “Other operating expenses – Changes in inventories” in the year which the income from its sale is recognized. This income is recognized under the heading “Other operating income – Financial income from non-financial services” in the consolidated income statements (seeNote 45).
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2.2.7 Business combinations
The aim of a business combination is to obtain control of one or more businesses. It is accounted for by applying the acquisition method.
According to this method, the acquirer has to recognize the assets acquired and the liabilities and contingent liabilities assumed, including those that the acquired entity had not recognized in the accounts. The method involves the measurement of the consideration received for the business combination and its allocation to the assets, liabilities and contingent liabilities measured according to their fair value, at the purchase date.
In addition, the purchasing entity shall recognize an asset in the consolidated balance sheet under the heading “Intangible asset – Goodwill” if on the purchase date there is a positive difference between:
the sum of the price paid, the amount of all the non-controlling interests and the fair value of stock previously held in the acquired business, and
the fair value of the assets acquired and liabilities assumed.
If this difference is negative, it shall be recognized directly in the income statement under the heading “Negative Goodwill in business combinations”.
Non-controlling interests in the acquired entity may be measured in two ways: either at their fair value; or at the proportional percentage of net assets identified in the acquired entity. The form of valuing the non-controlling holdings may be chosen in each business combination. So far, the BBVA Group has always opted for the second method.
The purchase of non-controlling interests subsequent to the takeover of the entity is recognized as capital transactions; in other words, the difference between the price paid and the carrying amount of the percentage of non-controlling interests acquired is charged directly to equity.
2.2.8 Intangible assets
Goodwill represents payment in advance by the acquiring entity for the future economic benefits from assets that cannot be individually identified and separately recognized. It is only recognized as goodwill when the business combinations are acquired at a price. Goodwill is never amortized. It is subject periodically to an impairment analysis, and is written off if it is clear that there has been impairment.
Goodwill is assigned to one or more units generating cash flows that expect to be the beneficiaries of the synergies derived from the business combinations. The cash-generating units represent the Group’s smallest identifiable asset groups that generate cash flows for the Group and that are largely independent of the flows generated from the Group’s other assets or groups of assets. Each unit or units to which goodwill is allocated
is the lowest level at which the entity manages goodwill internally;
is not larger than a business segment.
The cash-generating units to which goodwill has been allocated are tested for impairment (including the allocated goodwill in their carrying amount). This analysis is performed at least annually and always if there is any indication of impairment.
For the purpose of determining the impairment of a cash-generating unit to which a part of goodwill has been allocated, the carrying amount of that unit, adjusted by the theoretical amount of the goodwill attributable to the non-controlling interests, in the event they are not valued at fair value, is compared with its recoverable amount.
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The recoverable amount of a cash-generating unit is equal to the fair value less sale costs and its value in use, whichever is greater. Value in use is calculated as the discounted value of the cash flow projections that the unit’s management estimates and is based on the latest budgets approved for the coming years. The main assumptions used in its calculation are: a sustainable growth rate to extrapolate the cash flows indefinitely, and the discount rate used to discount the cash flows, which is equal to the cost of the capital assigned to each cash-generating unit, and equivalent to the sum of the risk-free rate plus a risk premium inherent to the businesses tested.
If the carrying amount of the cash-generating unit exceeds the related recoverable amount, the Group recognizes an impairment loss; the resulting loss is apportioned by reducing, first, the carrying amount of the goodwill allocated to that unit and, second, if there are still impairment losses remaining to be recognized, the carrying amount of the rest of the assets. This is done by allocating the remaining loss in proportion to the carrying amount of each of the assets in the unit. In the event the non-controlling interests are valued at fair value, the deterioration of goodwill attributable to minority interests will be recognized. In any case, an impairment loss recognized for goodwill shall not be reversed in a subsequent period.
They are recognized under the heading “Impairment losses on other assets (net) – Goodwill and other intangible assets” in the consolidated income statements (see Note 50).
These assets may have an indefinite useful life if, based on an analysis of all relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash flows for the consolidated entities. In all other cases they have a finite useful life. The BBVA Group has not recognized any intangible assets with an indefinite useful life
Intangible assets with a finite useful life are amortized according to the duration of this useful life, using methods similar to those used to depreciate tangible assets. The depreciation charge of these assets is recognized in the accompanying consolidated income statements under the heading “Depreciation and amortization” (see Note 47).
The consolidated entities recognize any impairment loss on the carrying amount of these assets with charge to the heading “Impairment losses on other assets (net) – Goodwill and other intangible assets” in the accompanying consolidated income statements (see Note 50). The criteria used to recognize the impairment losses on these assets and, where applicable, the recovery of impairment losses recognized in prior years, are similar to those used for tangible assets.
2.2.9 Insurance and reinsurance contracts
The assets of the BBVA Group’s insurance companies are recognized according to their nature under the corresponding headings of the consolidated balance sheets and their registration and valuation is carried out according to the criteria set out in IFRS 4.
The heading “Reinsurance assets” in the accompanying consolidated balance sheets includes the amounts that the consolidated entities are entitled to receive under the reinsurance contracts entered into by them with third parties and, more specifically, the share of the reinsurer in the technical provisions recognized by the consolidated insurance entities (see Note 18).
The heading “Liabilities under insurance contracts” in the accompanying consolidated balance sheets includes the technical provisions for direct insurance and inward reinsurance recognized by the consolidated entities to cover claims arising from insurance contracts in force at period-end (see Note 24).
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The income or expenses reported by the BBVA Group’s insurance companies on their insurance activities is recognized, attending to its nature in the corresponding items of the consolidated income statements.
The consolidated insurance entities of the BBVA Group credit the amounts of the premiums written to the income statement and charge the cost of the claims incurred on final settlement thereof to their income statements. At the close of each year the amounts collected and unpaid, as well as the costs incurred and unpaid are accrued at this date.
The most significant provisions registered by consolidated insurance entities with respect to insurance policies issued by them are set out by their nature in Note 24.
According to type of product, the provisions may be as follows:
Life insurance provisions: Represents the value of the net obligations undertaken with the life insurance policyholder. These provisions include:
Provisions for unearned premiums. These are intended for the accrual, at the date of calculation, of the premiums written. Their balance reflects the portion of the premiums accrued until the closing date has to be allocated to the period from the closing date to the end of the insurance policy period.
Mathematical reserves: Represents the value of the life insurance obligations of the insurance companies at the year-end, net of the policyholder’s obligations, arising from life insurance contracted.
Non-life insurance provisions:
Provisions for unearned premiums. These provisions are intended for the accrual, at the date of calculation, of the premiums written. Their balance reflects the portion of the premiums accrued until year-end that has to be allocated to the period between the year-end and the end of the policy period.
Provisions for unexpired risks: The provision for unexpired risks supplements the provision for unearned premiums by the amount by which that provision is not sufficient to reflect the assessed risks and expenses to be covered by the insurance companies in the policy period not elapsed at the year-end.
Provision for claims: This reflects the total amount of the outstanding obligations arising from claims incurred prior to the year-end. Insurance companies calculate this provision as the difference between the total estimated or certain cost of the claims not yet reported, settled or paid, and the total amounts already paid in relation to these claims.
Provision for bonuses and rebates: This provision includes the amount of the bonuses accruing to policyholders, insurees or beneficiaries and the premiums to be returned to policyholders or insurees, as the case may be, based on the behavior of the risk insured, to the extent that such amounts have not been individually assigned to each of them.
Technical provisions for reinsurance ceded: Calculated by applying the criteria indicated above for direct insurance, taking account of the assignment conditions established in the reinsurance contracts in force.
Other technical provisions: Insurance companies have recognized provisions to cover the probable mismatches in the market reinvestment interest rates with respect to those used in the valuation of the technical provisions.
The BBVA Group controls and monitors the exposure of the insurance companies to financial risk and, to this end, uses internal methods and tools that enable it to measure credit risk and market risk and to establish the limits for these risks.
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2.2.10 Tax assets and liabilities
Expenses on corporation tax applicable to the BBVA Group’s Spanish companies and on similar taxes applicable to consolidated entities abroad are recognized in the consolidated income statement, except when they result from transactions on which the profits or losses are recognized directly in equity, in which case the related tax effect is also recognized in equity.
The current corporate income tax expense is calculated by aggregating the current tax arising from the application of the corresponding tax rate to the tax for the year (after deducting the tax credits allowable for tax purposes) and the change in deferred tax assets and liabilities recognized in the consolidated income statement.
Deferred tax assets and liabilities include temporary differences, defined as at the amount expected to be payable or recoverable in future fiscal years for the differences between the carrying amount of assets and liabilities and their tax bases (the “tax value”), and tax loss and tax credit carry forwards. These amounts are measured applying to each temporary difference the tax rates that are expected to apply when the asset is realized or the liability settled (see Note 21).
The “Tax Assets” chapter of the consolidated balance sheets includes the amount of all the assets of a tax nature, and distinguishes between: “Current” (amounts recoverable by tax in the next twelve months) and “Deferred” (covering taxes recoverable in future years, including loss carry forwards or tax credits for deductions and tax rebates pending application).
The “Tax Liabilities” chapter of the accompanying consolidated balance sheets includes the amount of all the liabilities of a tax nature, except for provisions for taxes, broken down into: “Current” (income tax payable on taxable profit for the year and other taxes payable in the next twelve months) and “Deferred” (income taxes payable in subsequent years).
Deferred tax liabilities in relation to taxable temporary differences associated with investments in subsidiaries, associates or jointly controlled entities are recognized as such, except where the Group can control the timing of the reversal of the temporary difference and it is unlikely that it will reverse in the foreseeable future.
Deferred tax assets are recognized to the extent that it is considered probable that the consolidated entities will have sufficient taxable profits in the future against which the deferred tax assets can be utilized and are not from the initial recognition (except in the case of a business combination) of other assets or liabilities in a transaction that does not affect the fiscal outcome or the accounting result.
The deferred tax assets and liabilities recognized are reassessed by the consolidated entities at each balance sheet date in order to ascertain whether they are still current, and the appropriate adjustments are made on the basis of the findings of the analyses performed.
The income and expenses directly recognized in equity that do not increase or decrease taxable income are accounted as temporary differences.
2.2.11 Provisions, contingent assets and contingent liabilities
The heading “Provisions” in the consolidated balance sheets includes amounts recognized to cover the BBVA Group’s current obligations arising as a result of past events. These are certain in terms of nature but uncertain in terms of amount and/or extinguishment date. The settlement of these obligations is deemed likely to entail an outflow of resources embodying economic benefits (see Note 25). The obligations may arise in connection with legal or contractual provisions, valid expectations formed by Group companies relative to third parties in relation to the assumption of certain responsibilities or through virtually certain developments of particular aspects of the regulations applicable to the operation of entities; and, specifically, future legislation to which the Group will certainly be subject.
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The provisions are recognized in the consolidated balance sheets when each and every one of the following requirements is met:
They represent a current obligation that has arisen from a past event;
At the date referred to by the consolidated financial statements, there is more probability that the obligation will have to be met than that it will not;
It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
The amount of the obligation can be reasonably estimated.
Among other concepts, these provisions include the commitments made to employees by some of the Group entities (mentioned in section 2.2.12), as well as provisions for tax and legal litigation.
Contingent assets are possible assets that arise from past events and whose existence is conditional on, and will be confirmed only by, the occurrence or non-occurrence of events beyond the control of the Group. Contingent assets are not recognized in the consolidated balance sheet or in the consolidated income statement; however, they are disclosed in the Notes to financial statements, provided that it is probable that these assets will give rise to an increase in resources embodying economic benefits (see Note 36).
Contingent liabilities are possible obligations of the Group that arise from past events and whose existence is conditional on the occurrence or non-occurrence of one or more future events beyond the control of the entity. They also include the existing obligations of the entity when it is not probable that an outflow of resources embodying economic benefits will be required to settle them; or when, in extremely rare cases, their amount cannot be measured with sufficient reliability.
2.2.12 Pensions and other post-employment commitments
Below is a description of the most significant accounting criteria relating to the commitments to employees, in terms of post-employment benefits and other long-term commitments, of certain BBVA Group companies in Spain and abroad (see Note 26).
Commitments’ valuation: assumptions and actuarial gains/losses recognition
The present values of the commitments are quantified on a case-by-case basis. Costs are calculated using the projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit/commitment and measures each unit separately to build up the final obligation.
The actuarial assumptions should take into account that:
They are unbiased, in that they are not unduly aggressive nor excessively conservative.
They are compatible with each other and adequately reflect the existing economic relations between factors such as inflation, foreseeable wage increases, discount rates and the expected return on plan assets, etc. The expected return on plan assets is calculated by taking into account both market expectations and the particular nature of the assets involved.
The future levels of wages and benefits are based on market expectations at the consolidated balance sheet date for the period over which the obligations are to be settled.
The rate used to discount the commitments is determined by reference to market yields at the date referred to by the consolidated financial statements on high quality bonds.
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The BBVA Group recognizes actuarial differences originating in the commitments assumed with staff taking early retirement, benefits awarded for seniority and other similar items under the heading “Provisions (net)” of the consolidated income statement for the period (see Note 48) in which these differences occur. The BBVA Group recognizes the actuarial gains or losses arising on all other defined-benefit post-employment commitments directly under the heading “Valuation adjustments” of equity in the accompanying consolidated balance sheets (see Note 26).
Consequently, the Group does not apply the option of deferring actuarial gains and losses to any of its employee commitments using the so-called corridor approach.
Post-employment benefit commitments
Pensions: The BBVA Group’s post-employment benefit commitments are either defined-contribution or defined-benefit.
Defined-contribution commitments: The amounts of these commitments are established as a percentage of certain remuneration items and/or as a fixed pre-established amount. The contributions made in each period by the BBVA Group’s companies for these commitments are recognized with a charge to the heading “Personnel expenses- Defined-contribution plan expense” in the consolidated income statements (see Note 46).
Defined-benefit commitments: Some of the BBVA Group’s companies have defined-benefit commitments for the permanent disability and death of certain current employees and early retirees, as well as defined-benefit retirement commitments applicable only to certain groups of current employees, or early retired employees and retired employees. These commitments are either funded by insurance contracts or recorded as internal provisions.
The amounts recognized under the heading “Provisions – Provisions for pensions and similar obligations” (see Note 25) are the differences, at the date of the consolidated financial statements, between the present values of the commitments for defined-benefit commitments, adjusted by the past service cost and the fair value of plan assets.
The current contributions made by the Group’s companies for defined-benefit commitments covering current employees are charged to the heading “Administration cost – Personnel expenses” in the accompanying consolidated income statements (see Note 46).
Early retirements: The BBVA Group has offered certain employees in Spain the possibility of taking early retirement before the age stipulated in the collective labor agreement in force and has put into place the corresponding provisions to cover the cost of the commitments acquired by this item. The present values for early retirement are quantified on a case-by-case basis and are recognized under the heading “Provisions – Provisions for pensions and similar obligations” in the accompanying consolidated balance sheets (see Note 25).
The early retirement commitments in Spain include the compensation and indemnities and contributions to external pension funds payable during the period of early retirement. The commitments relating to this group of employees after they have reached normal retirement age are dealt in the same way as pensions.
Other post-employment welfare benefits Some of the BBVA Group’s companies have welfare benefit commitments whose effects extend beyond the retirement of the employees entitled to the benefits. These commitments relate to certain current employees and retirees, depending upon the employee group to which they belong.
The present values of post-employment welfare benefits are quantified on a case-by-case basis and are recognized under the heading “Provisions – Provisions for pensions and similar obligations” in the consolidated balance sheets (see Note 25).
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Other long-term commitments to employees
Some of the BBVA Group’s companies are obliged to deliver goods and services to groups of employees. The most significant of these, in terms of the type of compensation and the event giving rise to the commitments are as follows: loans to employees, life insurance, study assistance and long-service awards.
Some of these commitments are measured using actuarial studies, so that the present values of the vested obligations for commitments with personnel are quantified on a case-by-case basis. They are recognized under the heading “Provisions – Other provisions” in the accompanying consolidated balance sheets (see Note 25).
The welfare benefits delivered by the Spanish companies in the BBVA Group to active employees are recognized under the heading “Personnel expenses – Other personnel expenses” in the consolidated income statements (see Note 46).
Other commitments for current employees accrue and are settled on a yearly basis, so it is not necessary to record a provision in this connection.
2.2.13 Equity-settled share-based payment transactions
Equity-settled share-based payment transactions, when the instruments granted do not vest until the counterparty completes a specified period of service, shall be accounted for those services as they are rendered by the counterparty during the vesting period, with a corresponding increase in equity. These services are measured at fair value, unless this value cannot be calculated reliably. In this case, they are measured by reference to the fair value of the equity instruments committed, taking into account the date on which the commitments were assumed and the terms and other conditions included in the commitments.
When the initial compensation agreement includes what may be considered market conditions among its terms, any changes in these conditions will not be reflected in the consolidated income statement, as these have already been accounted for in calculating the initial fair value of the equity instruments. Non-market vesting conditions are not taken into account when estimating the initial fair value of instruments, but they are taken into account when determining the number of instruments to be granted. This will be recognized on the consolidated income statement with the corresponding increase in equity.
2.2.14 Termination benefits
Termination benefits are recognized in the accounts when the BBVA Group agrees to terminate employment contracts with its employees and has established a detailed plan to do so. As of December 31, 2011, there were no redundancy plans in the Group entities, so it is not necessary to recognize a provision for this item.
2.2.15 Treasury stock
The value of equity instruments issued by the BBVA Group’s entities and held by them – basically, shares and derivatives on the Bank’s shares held by some consolidated companies that comply with the requirements to be recognized as equity instruments – are recognized under the heading “Stockholders’ funds – Treasury stock” in the consolidated balance sheets (see Note 30).
These financial assets are recognized at acquisition cost, and the gains or losses arising on their disposal are credited or debited, as appropriate, to the heading “Stockholders’ funds – Reserves” in the consolidated balance sheets (see Note 29).
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2.2.16 Foreign-currency transactions and exchange differences
The BBVA Group’s functional currency, and thus the currency in which the consolidated financial statements are presented, is the euro. All balances and transactions denominated in currencies other than the euro are deemed to be denominated in “foreign currency”.
Conversion to euros of the balances held in foreign currency is performed in two consecutive stages:
Conversion of the foreign currency to the functional currency (currency of the main economic environment in which the entity operates) and
Conversion to euros of the balances held in the functional currencies of the entities whose functional currency is not the euro.
Conversion of the foreign currency to the functional currency
Transactions in foreign currencies carried out by the consolidated entities (or accounted for using the equity method) not based in European Monetary Union countries are initially accounted in their respective currencies. Subsequently, the monetary balances in foreign currencies are converted to their respective functional currencies using the exchange rate at the close of the financial year.
In addition,
Non-monetary items valued at their historical cost are converted to the functional currency at the exchange rate in force on the purchase date.
Non-monetary items valued at their fair value are converted at the exchange rate in force on the date on which such fair value was determined.
Income and expenses are converted at the period’s average exchange rates for all the operations carried out during the period. When applying this criterion the BBVA Group considers whether significant variations have taken place in exchange rates during the financial year which, owing to their impact on the statements as a whole, require the application of exchange rates as of the date of the transaction instead of such average exchange rates.
Conversion of functional currencies to euros
The balances in the financial statements of consolidated entities whose functional currency is not the euro are converted to euros as follows:
Assets and liabilities: at the average spot exchange rates as of the date of each of the consolidated financial statements.
Income and expenses and cash flows are converted by applying the exchange rate in force on the date of the transaction, and the average exchange rate for the financial year may be used, unless it has undergone significant variations.
Equity items: at the historical exchange rates.
The exchange differences produced when converting the balances in foreign currency to the functional currency of the consolidated entities and their subsidiaries are generally recognized under the heading “Exchange differences (net)” in the consolidated income statements. However, the exchange differences in non-monetary items are recognized temporarily in equity under the heading “Valuation adjustments – Exchange differences” in consolidated balance sheets.
The exchange differences arising from the conversion to euros of balances in the functional currencies of the consolidated entities whose functional currency is not the euro are recognized under the heading “Valuation adjustments – Exchange differences” in the consolidated balance sheets. Meanwhile, the
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differences arising from the conversion to euros of the financial statements of entities accounted for by the equity method are recognized under the heading “Valuation adjustments – Entities accounted for using the equity method” until the item to which they relate is derecognized, at which time they are recognized in the income statement.
The breakdown of the main consolidated balances in foreign currencies as of December 31, 2011, 2010 and 2009, with reference to the most significant foreign currencies, is set forth in Appendix IX.
2.2.17 Recognition of income and expenses
The most significant criteria used by the BBVA Group to recognize its income and expenses are as follows:
Interest income and expenses and similar items: As a general rule, interest income and expenses and similar items are recognized on the basis of their period of accrual using the effective interest rate method. The financial fees and commissions that arise on the arrangement of loans (basically origination and analysis fees) must be deferred and recognized in the income statement over the expected life of the loan. The direct costs incurred in arranging these transactions can be deducted from the amount thus recognized. These fees are part of the effective rate for loans. Also dividends received from other companies are recognized as income when the consolidated companies’ right to receive them arises.
However, when a debt instrument is deemed to be impaired individually or is included in the category of instruments that are impaired because of amounts more than three months past-due, the recognition of accrued interest in the consolidated income statement is interrupted. This interest is recognized for accounting purposes as income, as soon as it is received.
Commissions, fees and similar items: Income and expenses relating to commissions and similar fees are recognized in the consolidated income statement using criteria that vary according to the nature of such items. The most significant items in this connection are:
Those relating to financial assets and liabilities measured at fair value through profit or loss, which are recognized when collected/paid.
Those arising from transactions or services that are provided over a period of time, which are recognized over the life of these transactions or services.
Those relating to single acts, which are recognized when this single act is carried out.
Non-financial income and expenses: These are recognized for accounting purposes on an accrual basis.
Deferred collections and payments: These are recognized for accounting purposes at the amount resulting from discounting the expected cash flows at market rates.
2.2.18 Sales and income from the provision of non-financial services
The heading “Other operating income – Financial income from non-financial services” in the consolidated income statements includes the carrying amount of the sales of assets and income from the services provided by the consolidated Group companies that are not financial institutions. In the case of the Group, these companies are mainly real estate and service companies (seeNote 45).
2.2.19 Leases
Lease contracts are classified as finance from the start of the transaction, if they transfer substantially all the risks and rewards incidental to ownership of the asset forming the subject-matter of the contract. Leases other than finance leases are classified as operating leases.
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When the consolidated entities act as the lessor of an asset in finance leases, the aggregate present values of the lease payments receivable from the lessee plus the guaranteed residual value (normally the exercise price of the lessee’s purchase option on expiration of the lease agreement) are recognized as financing provided to third parties and, therefore, are included under the heading “Loans and receivables” in the accompanying consolidated balance sheets.
When the consolidated entities act as lessors of an asset in operating leases, the acquisition cost of the leased assets is recognized under “Tangible assets – Property, plants and equipment – Other assets leased out under an operating lease” in the consolidated balance sheets (see Note 19). These assets are depreciated in line with the criteria adopted for items of tangible assets for own use, while the income arising from the lease arrangements is recognized in the consolidated income statements on a straight-line basis within “Other operating income – Rest of other operating income” (see Note 45).
If a fair value sale and leaseback results in an operating lease, such as the transactions indicated in Note 16.1, the profit or loss generated by the sale is recognized in the consolidated income statement at the time of sale. If such a transaction gives rise to a finance lease, the corresponding gains or losses are amortized over the lease period.
The assets leased out under operating lease contracts to other entities in the Group are treated in the consolidated financial statements as for own use, and thus rental expense and income is eliminated and the corresponding depreciation is registered.
2.2.20 Consolidated statements of recognized income and expenses
The consolidated statements of recognized income and expenses reflect the income and expenses generated each year. They distinguish between income and expenses recognized as results in the consolidated income statements and “Other recognized income (expenses)” recognized directly in consolidated equity. “Other recognized income (expenses)” include the changes that have taken place in the year in the “Valuation adjustments” broken down by item.
The sum of the changes to the heading “Valuation adjustments” of the consolidated total equity and the consolidated net income of the year forms the “Total recognized income/expenses of the year”.
2.2.21 Consolidated statements of changes in equity
The consolidated statements of changes in equity reflect all the movements generated in each year in each of the headings of the consolidated equity, including those from transactions undertaken with shareholders when they act as such, and those due to changes in accounting criteria or corrections of errors, if any.
The applicable regulations establish that certain categories of assets and liabilities are recognized at their fair value with a charge to equity. These charges, known as “Valuation adjustments” (see Note 31), are included in the Group’s total consolidated equity net of tax effect, which has been recognized as deferred tax assets or liabilities, as appropriate.
2.2.22 Consolidated statements of cash flows
The indirect method has been used for the preparation of the consolidated statement of cash flows. This method starts from the entity’s consolidated net income and adjusts its amount for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated cash flows classified as investment or finance. As well as cash, short-term, highly liquid investments subject to a low risk of changes in value, such as cash and deposit balances from central banks, are classified as cash and equivalents.
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When preparing these financial statements the following definitions have been used:
Cash flows: Inflows and outflows of cash and equivalents.
Operating activities: The typical activities of credit institutions and other activities that cannot be classified as investment or financing activities.
Investing activities: The acquisition, sale or other disposal of long-term assets and other investments not included in cash and cash equivalents or in operating activities.
Financing activities: Activities that result in changes in the size and composition of the Group’s equity and of liabilities that do not form part of operating activities.
2.2.23 Entities and branches located in countries with hyperinflationary economies
According to the criteria established by the EU-IFRS required to be applied under the Bank of Spain Circular 4/2004 of December 22, 2004 and in compliance with IFRS-IAB in order to assess whether an economy has a hyperinflationary inflation rate, the country’s economic environment is evaluated, analyzing whether certain circumstances exist, such as:
The country’s population prefers to keep its wealth or savings in non-monetary assets or in a relatively stable foreign currency;
Prices may be quoted in that currency;
Interest rates, wages and prices are linked to a price index;
The cumulative inflation rate over three years is approaching, or exceeds, 100%.
The fact that any of these circumstances is fulfilled will not be a decisive factor in considering an economy hyperinflationary, but it does provide some reasons to consider it as such.
Since the close of 2009, the economy of Venezuela can be considered hyperinflationary under the above criteria. The financial statements as of December 31, 2011, 2010 and 2009 of the BBVA Group’s entities located in Venezuela (see Note 3) have therefore been adjusted to correct for the effects of inflation. Pursuant to the requirements of IAS 29, the monetary headings (mainly loans and credits) have not been re-expressed, while the non-monetary headings (mainly tangible fixed assets) have been re-expressed in accordance with the change in the country’s Consumer Price Index.
The historical differences as of January 1, 2009 between the re-expressed costs and the historical costs under the non-monetary headings were credited to “Reserves” on the accompanying consolidated balance sheet as of December 31, 2009, while the differences for 2011, 2010 and 2009, and the re-expression of the income statement for 2011, 2010 and 2009 were recognized in the consolidated income statement for those years. The effects of these adjustments for inflation on the consolidated income statements for 2011, 2010 and 2009 were not significant.
2.3 Recent IFRS pronouncements
Changes introduced in 2011 –
The following modifications to the IFRS or their interpretations (“IFRIC”) came into force in 2011. They have not had a significant impact on the BBVA Group’s consolidated financial statements for the year:
IAS 24 Revised – “Related party disclosures”: This amendment to IAS 24 deals with the disclosures of related parties in the financial statements. It contains two significant new points:
A partial exemption for certain disclosures has been introduced when the related part is produced an entity that is dependent on or related to the government (or equivalent government institution).
The definition of “related party” has been amended and some of the relations that were not explicit in the rule have been clarified.
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IAS 32 Revised – “Financial instruments: Presentation – Classification of rights issues”: The amendment to IAS 32 clarifies the classification of rights issues (instruments that entitle the holder to acquire instruments from the entity at a fixed price) when they are in a currency other than the issuer’s functional currency.
The proposed amendment establishes that those rights, options or warrants issued to acquire a fixed number of own equity instruments for a fixed amount will be classified as equity regardless of the currency in which the right is exercised, provided that the entity offers them pro rata to all of the existing shareholders.
Amendment to IFRIC 14 – “Prepayments of a minimum funding requirement”: This amendment corrects the fact that under the previous version of IFRIC 14, in certain circumstances some prepayments of minimum funding requirements to pension funds could not be recognized as assets.
IFRIC 19 – “Extinguishing financial liabilities with equity instruments”: This addresses the accounting procedure, from the point of view of the debtor, used when a financial liability is totally or partially extinguished through the issue of equity instruments to the creditor. The interpretation is not applicable to this type of transaction when the counterparties are shareholders or related parties and act as such, nor when the exchange for equity instruments is in accordance with the original terms of the financial liability. In this case, the issue of equity instruments shall be measured at fair value on the date the liability is extinguished and any difference between this value and the carrying amount of the liability shall be recognized on the income statement for the period.
Third annual improvements project, improvements to IFRS: The third annual improvement project, improvements to IFRS, incorporates small modifications that will mostly be applicable for accounting years following January 1, 2011. The modifications mainly deal with eliminating inconsistencies in some IFRS and clarifying the terminology used.
Standards and interpretations issued but not yet effective as of December 31, 2011 –
New International Financial Reporting Standards together with their interpretations (IFRIC) had been published at the date of preparation of these consolidated financial statements. These were not obligatory as of December 31, 2011. Although in some cases the IASB permits early adoption before they enter into force, the BBVA Group has not done so as of this date, as it is still analyzing the effects that will result from them.
IFRS 9 – “Financial Instruments – Classification and Measurement”: On November 12, 2009, the IASB published IFRS 9 – “Financial Instruments” as the first stage of its plan to replace IAS 39 – “Financial Instruments: Recognition and measurement”. IFRS 9, which introduces new classification and measurement requirements for financial assets, will be mandatory from January 1, 2015 onwards, although early adoption has been permitted from December 31, 2009 onwards. However, the European Commission has decided not to adopt IFRS 9 and postpone its entry into force, thus making it impossible for European entities to apply this standard early.
The new standard includes significant differences with respect to the current one. They include the following:
Approval of a new classification model based on two single categories of amortized cost and fair value;
Elimination of the current “Held-to-maturity-investments” and “Available-for-sale financial assets” categories;
Limitation of the analysis of impairment of assets measured at amortized cost; and
No separation of embedded derivatives in financial contracts on the entity’s assets.
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Amendment of IFRS 7 – “Disclosures – Transfer of financial assets”: There has been a modification of the disclosure requirements applicable to transfers of financial assets in which the assets are not derecognized from the balance sheets, and to transfers of financial assets in which the assets qualify for derecognition, but with which the entity still has some continuing involvement. The information disclosed must allow the following:
understanding of the relationship between transferred financial assets that are not derecognized in their entirety and associated liabilities; and
evaluation of the nature of, and the risks associated with, the entity’s continuing involvement in the transferred and derecognized financial assets.
Disclosures are also required for asset transfers when the transfers have been distributed unevenly over the year.
These modifications will be applied to the years starting after July 1, 2011, although early adoption is permitted.
IAS 12 Revised – “Income Taxes – Deferred Tax: recovery of underlying Assets”: IAS 12 establishes that the deferred tax assets and liabilities will be calculated by using the tax base and the tax rate corresponding according to the form in which the entity expects to recover or cancel the corresponding asset or liability: by the use of the asset or by its sale.
The IASB has published a modification to IAS 12 which includes the assumption when calculating the assets and liabilities for deferred taxes that the recovery of the underlying asset will be carried out through its sale in investment property valued at fair value under IAS 40 “Investment Property”. However, an exception is admitted if the investment is depreciable and is managed according to a business model whose objective is to use the profits from the investment over time, and not from its sale.
At the same time, IAS 12 includes the content of SIC 21 – “Income Taxes – Recovery of revalued non-depreciable assets”. This interpretation is withdrawn.
These modifications will be applied retrospectively to the accounting years following January 1, 2012, although early adoption is permitted.
IFRS 10 – “Consolidated financial statements”: IFRS 10 establishes a single consolidation model based on the principle of control, and applicable to all types of entities. Likewise, it introduces a definition of control, according to which a reporting entity controls another entity when it is exposed or has rights to variable returns from its involvements with the entity and has the ability to affect the amount of returns through its power over the entity.
The new standard will replace IAS 27 – “Consolidated and separate financial statements” and SIC 12 – “Consolidation – Special Purpose Entities”. It will be applied to accounting years starting from January 1, 2013. However, early adoption is permitted. In this case it must be applied together with IFRS 11 and IFRS 12.
IFRS 11 – “Joint arrangements”: IFRS 11 introduces new consolidation principles applicable to all joint arrangements and will replace SIC 13 – “Jointly Controlled Entities” and IAS 31 – “Interests in Joint Ventures”.
The new standard defines joint arrangements and establishes that they shall be classified as joint operations or as joint ventures based on the rights and obligations arising from the arrangement. A joint operation is when the parties who have joint control have rights to the assets of the arrangement and obligations to the liabilities of the arrangement. A joint venture is when the parties who have joint control have rights to the net assets of the arrangement.
Joint operations shall be accounted for by including them in the financial statements of the entities controlling the assets, liabilities, income and expenses corresponding to them according to the
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contractual agreement. Joint ventures shall be accounted for in the consolidated financial statements using the equity method. They can no longer be accounted for by the proportionate consolidation method.
IFRS 11 shall be applied to accounting years starting on or after January 1, 2013. However, early adoption is permitted. In this case it must be applied together with IFRS 10 and IFRS 12.
IFRS 12 – “Disclosure of Interests in other entities”: IFRS 12 is a new standard on the disclosure requirements for all types of holdings in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities.
IFRS 12 shall be applied to accounting years starting on or after January 1, 2013. However, early adoption is permitted. In this case it must be applied together with IFRS 10 and IFRS 11.
IFRS 13 – “Fair Value Measurement”: IFRS 13 provides guidelines for fair value measurement and disclosure requirements. Under the new definition, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The requirements of the standard do not extend the use of fair value accounting. However, they do provide a guide about how fair value should be applied when its use is required or permitted by other standards.
This new standard shall be prospectively applied as of January 1, 2013. Early adoption is permitted.
IAS 1 amended – “Presentation of Financial Statements”: The modifications made to IAS 1 include improvements and clarifications regarding the presentation of “Other recognized income (expenses)” (valuation adjustments). The main change introduced is that the presentation of the concepts must distinguish those that can be reclassified to earnings in the future from those that cannot.
The revision to IAS 1 shall be applied to accounting years starting on or after July 1, 2012, although early adoption is permitted.
Amended IAS 19 – “Employee Benefits”: The amended IAS 19 introduces modifications to the accounting of post-employment benefit liabilities and commitments.
All changes in the fair value of assets from post-employment plans and obligations in the defined benefit plans shall be recognized in the period in which they occur; they shall be recognized as valuation adjustments in equity and shall not be considered as earnings in future years. Thus, the options under the current standard to defer these changes in value (“corridor method”) or to recognize them in the year’s earnings have been eliminated. The Group’s policy will be to transfer the amounts recognized under the heading “Valuation adjustments” to the heading “Reserves” in the consolidated balance sheet.
The presentation of fair value changes in assets in plans and changes in post-employment benefit obligations of defined-benefit plans has been clarified:
Greater disclosure of information is required.
These modifications will be applied to the accounting years starting on or after January 1, 2013, although early adoption is permitted.
IAS 32 revised – “Financial Instruments: Presentation”: The changes made to IAS 32 clarify the following aspects on asset and liability netting:
The legal right to net recognized amounts must not depend on a future event and must be legally enforceable under all circumstances, including cases of default or insolvency of either party.
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Settlements in which the following conditions are met shall be accepted as equivalent to “settlements for net amount”:
all or practically all of the credit and liquidity risk is eliminated
settlement of the asset and liability is performed in one single settlement process
These modifications will be applied to the accounting years starting on or after January 1, 2014, although early adoption is permitted.
IFRS 7 revised – “Financial Instruments: Information to be disclosed”: The changes made to IAS 7 introduce new disclosures of information on asset and liability netting: The entities must submit a breakdown of information on the gross and net amounts of the financial assets that have been or may be netted, and for all recognized financial instruments included in some type of master netting agreement, whether or not they have been netted.
These modifications will be applied to the accounting years starting on or after January 1, 2013.
The BBVA Group is an international diversified financial group with a significant presence in retail banking, wholesale banking, asset management and private banking. It also operates in other sectors, such as insurance, real estate, operating leases, etc.
Appendices II to IV inclusive provide relevant information as of December 31, 2011 on the Group’s subsidiaries, proportionately consolidated jointly controlled entities, and investments and jointly controlled entities accounted for by the equity method. Appendix V shows the main changes in investments in 2011, and Appendix VI gives details of the subsidiaries under the full consolidation method and which, based on the information available, were more than 10% owned by non-Group shareholders as of December 31, 2011.
The following table sets forth information related to the Group’s total assets as of December 31, 2011, 2010 and 2009 and the Group’s income attributed to the parent company for 2011, 2010 and 2009, broken down by the companies in the group according to their activity:
Contribution to Consolidated Group.
Entities by Main Activities
Banks and other financial services
Insurance and pension fund managing companies
Other non-financial services
The total assets and earnings as of December 31, 2011, 2010 and 2009, broken down by the geographical areas in which the BBVA Group operates, are included in Note 6.
The BBVA Group’s activity is mainly located in Spain, Mexico, South America and the United States, with an active presence in other European countries and Asia:
Spain: The Group’s activity in Spain is principally through Banco Bilbao Vizcaya Argentaria, S.A., which is the parent company of the BBVA Group. The Group also has other companies that operate in Spain’s banking sector, insurance sector, real estate sector, services and as operating lease companies.
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Rest of Europe: The Group’s activity in Europe is carried out through representative offices (Moscow and Istanbul), operational branches (Germany, Belgium, France, Italy and the United Kingdom) and banks and financial institutions in Ireland, Switzerland, Italy and Portugal. In March 2011, the BBVA Group acquired 25.01% of the share capital of the Turkish bank Turkiye Garanti Bankasi, AS (hereinafter, “Garanti”). Garanti heads up a group of banking and financial institutions that operate in Turkey, Holland, and some countries in Eastern Europe.
Asia: The Group’s activity in Asia is carried out through operational branches (in Taipei, Seoul, Tokyo, Hong Kong and Singapore) and representative offices (in Beijing, Shanghai and Mumbai). The BBVA Group also has several agreements with the CITIC Group (“CITIC”) for a strategic alliance in the Chinese market (see Note 17). The investment in the CITIC Group includes the investment in Citic International Financial Holdings Limited (“CIFH”) and China National Citic Bank (“CNCB”).
Mexico: The Group’s presence in Mexico dates back to 1995. It operates both in the banking sector through BBVA Bancomer, S.A., and in the insurance and pensions business, mainly through Seguros Bancomer S.A. de C.V., Pensiones Bancomer, S.A. de C.V. and Administradora de Fondos para el Retiro Bancomer, S.A. de C.V. All these are part of the BBVA Bancomer Financial Group.
South America: The BBVA Group’s activity in South America is mainly focused on the banking, insurance and pensions sectors, in the following countries: Chile, Venezuela, Colombia, Peru, Argentina, Panama, Paraguay and Uruguay. It is also active in Bolivia and Ecuador in the pensions sector.
The Group owns more than 50% of most of the companies based in these countries. Appendix II shows a list of the companies which, although less than 50% owned by the BBVA Group, are as of December 31, 2011 fully consolidated as a result of agreements between the Group and the other shareholders, giving the BBVA Group effective control of these entities (see Note 2.1).
United States (including Puerto Rico): The Group’s activity in the United States is mainly carried out through a group of companies with BBVA Compass Bancshares, Inc. at their head. This bank was acquired by BBVA in 2007 and in 2008 it merged the three Texas-based banks it owned, State National Bancshares, Inc., Texas National Bank, Inc. and Laredo National Bank, Inc.
In 2009, BBVA Compass, Inc. acquired some of the assets and liabilities of Guaranty Bank, Inc. (hereinafter, “Guaranty”) from the Federal Deposit Insurance Corporation (FDIC). Garanty is based in the United States. The BBVA group also has a significant presence in Puerto Rico through the bank BBVA Puerto Rico.
Below we give more details of the most important changes that have taken place in the BBVA Group in 2011, 2010 and 2009:
2011 –
Acquisition of a capital holding in the bank Garanti: On March 22, 2011, through the execution of the agreements signed in November 2010 with the Dogus group and having obtained the corresponding authorizations, BBVA completed the acquisition of a 24.89% holding of the share capital of Turkiye Garanti Bankasi, AS. Subsequently, an additional 0.12% holding was acquired on the market, taking the BBVA Group’s total holding in the share capital of Garanti to 25.01% as of December 31, 2011. The total price of both acquisitions amounted to USD 5,876 million (approximately€4,408 million).
The agreements with the Dogus group include an arrangement for the joint management of the bank and the appointment of some of the members of its Board of Directors by the BBVA Group.
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BBVA also has a perpetual option to purchase an additional 1% of Garanti Bank five years after the initial purchase. If it exercised this option the BBVA Group would have effective control of the company.
As of December 31, 2011, the goodwill registered by these acquisitions amounted to €1,262 million (see Note 20.1), although this amount is provisional, as under IFRS 3 a period of one year is allowed to make a definitive determination. BBVA financed part of this acquisition with funds from the capital increase carried out on November 29, 2010 (see Note 27).
This 25.01% holding in Garanti is consolidated in the BBVA Group using the proportionate consolidation method due to the aforementioned joint management agreements, and its contribution to the BBVA Group as of December 31, 2011, after applying the corresponding standardization and consolidation adjustments, represents 3.06% of the Group’s total assets (€18,309 million) and 2.66% of its total liabilities (€14,850 million) at that date.
The contribution of Garanti to the BBVA Group’s consolidated income statement from the date of its acquisition to December 31, 2011, after making the corresponding standardization and consolidation adjustments, was €428 million to “Net interest income”, €580 million to “Gross income”, and €193 million to “Consolidated net income for the year”. This represents a total of 6.43% of the Group’s consolidated net income in 2011.
Purchase of Credit Uruguay Banco: In May 2010, the BBVA Group announced that it had reached an agreement to acquire, through its subsidiary BBVA Uruguay, the Credit Uruguay Banco, from a French financial group. On January 18, 2011, after obtaining the corresponding authorizations, the purchase of Credit Uruguay Banco was completed for approximately €78 million, generating goodwill for an insignificant amount.
Takeover of Finanzia Banco de Crédito S.A.U.: The Directors of the entities Finanzia Banco de Crédito, S.A.U. and Banco Bilbao Vizcaya Argentaria, S.A., in meetings of their respective boards of directors held on January 28, 2011 and February 1, 2011, respectively, approved a project for the takeover of Finanzia Banco de Crédito, S.A.U. by Banco Bilbao Vizcaya Argentaria, S.A. and the subsequent transfer of all its equity interest to Banco Bilbao Vizcaya Argentaria, S.A., which acquired all the rights and obligations of the company it had purchased through universal succession.
The merger agreement was submitted for approval at the AGM of the shareholders of the companies involved. The merger was entered into the Companies Register on July 1, 2011, and thus on this date the target bank was dissolved, although for accounting purposes the takeover was carried out on January 1, 2011, with no effect at the consolidated level.
2010 –
On April 1, 2010, after obtaining the corresponding authorizations, the purchase of an additional 4.93% of CNCB’s capital was finalized for €1,197 million. After the acquisition, BBVA’s holding of the share capital of CIFH and CNCB amounted to 29.68% and 15%, respectively (see Note 17.1).
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2009 –
Purchase of assets and liabilities of Guaranty Bank: On August 21, 2009, BBVA Compass Inc acquired certain Guaranty Bank assets and liabilities from FDIC through a public auction for qualified investors. BBVA Compass Inc. acquired assets, mostly loans, for approximately USD 11,441 million (approximately €8,016 million) and assumed liabilities, mostly customer deposits, for USD 12,854 million (approximately €9,006 million). On December 31, 2009, using the purchase method, the comparison between the fair values assigned at the time of the purchase to the assets and liabilities acquired from Guaranty Bank (including the cash payment that FDIC made in consideration of the transaction (USD 2,100 million) generated a difference€99 million, recognized under the heading “Negative goodwill” in the accompanying consolidated income statement for the year 2009. The assets and liabilities acquired amounted to 1.5% and 1.8%, respectively, of the BBVA Group’s total assets on the acquisition date.
At the same time, the purchase included a loss-sharing agreement with the U.S. supervisory body FDIC under which the latter undertook to assume 80% of the losses of the loans purchased by the BBVA Group up to the first USD 2,285 million, and up to 95% of the losses if they exceeded this amount. This commitment has a maximum term of 5 and 10 years, according to the different portfolios in which the loans were classified.
Takeovers of Banco de Crédito Local de España, S.A. and BBVA Factoring E.F.C., S.A.: The directors of the subsidiaries Banco de Crédito Local de España, S.A. (Unipersonal), and BBVA Factoring E.F.C., S.A. (Unipersonal), in meetings of their respective boards of directors held on January 26, 2009, and of Banco Bilbao Vizcaya Argentaria, S.A. in its board of directors meeting held on January 27, 2009, approved respective projects for the takeover of both companies by BBVA and the subsequent transfer of all their equity interest to BBVA, which acquired all the rights and obligations of the companies it had purchased through universal succession.
The merger agreement was submitted for approval at the AGM of the shareholders of the companies involved. Both takeovers were entered into the Companies Register on June 5, 2009, and thus on this date the companies acquired were dissolved, although for accounting purposes the takeover was carried out on January 1, 2009, with no effect on the Group’s consolidated financial statements.
New scheme for shareholder remuneration –
The new shareholder remuneration scheme called the “Dividend Option” was implemented in 2011 through two share capital increases charge to voluntary reserves approved by the Bank’s Shareholders’ Annual General Meeting held on March 11, 2011, as the fifth point of the Agenda. Under the new scheme, BBVA has offered its shareholders the chance to receive part of their remuneration in the form of free shares; however, they can still choose to receive it in cash by selling the rights assigned to them in each capital increase either to BBVA (by the Bank exercising its commitment to repurchase the free allotment rights) or on the market.
Shareholder remuneration in 2011 –
In 2011, the following payments were made and settled to shareholders:
A third interim dividend on 2010 earnings was paid and settled on January 10, 2011 for a gross amount of€0.09 per share (€0.0729 net).
To implement the “Dividend Option”, the first capital increase charged to voluntary reserves was carried out in April 2011. As a result, the Bank’s share capital increased by €29,740,199.65, through the issue and circulation of 60,694,285 shares with a par value of €0.49 each (see Note 27). The Bank also acquired 909,945,425 pre-emptive subscription rights, at the guaranteed fixed price of €0.149 gross each, for a total of€135,581,868.33.
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An interim dividend on 2011 earnings was paid and settled on July 8, 2011 for a gross amount of€0.10 per share (€0.081 net).
The second capital increase charged to voluntary reserves under the “Dividend Option” program was carried out in October 2011. As a result, the Bank’s share capital increased by €38,422,617.94, through the issue and circulation of 78,413,506 shares with a par value of €0.49 each (see Note 27). The Bank also acquired 433,637,066 pre-emptive subscription rights, at the guaranteed fixed price of €0.10 gross each, for a total of€43,363,706.60.
On December 20, 2011, the Board of Directors agreed to pay a second interim dividend on 2011 earnings for a gross amount of €0.10 (€0.079) per share. It was paid to the shareholders on January 10, 2012.
Dividends –
The aggregate amount of the interim dividends declared as of December 31, mentioned above, net of the amount collected by the BBVA Group companies, was€937 million and was recognized under the heading “Stockholders’ funds – Dividends and remuneration” in the accompanying consolidated balance sheet.
The provisional financial statement prepared by Banco Bilbao Vizcaya Argentaria, S.A. for 2011 in accordance with legal requirements evidenced the existence of sufficient earnings for the distribution of the amounts to the interim dividend, as follows:
Available amount for interim dividend payments
Profit at each of the dates indicated, after the provision for income tax
Less –
Estimated provision for Legal Reserve
Acquisition by the bank of the free allotment rights in 2011 capital increase
Interim dividends for 2011 already paid
Maximum amount distributable
Amount of proposed interim dividend
BBVA cash balance available to the date
The table below shows the allocation of the Bank’s earnings for 2011 that the Board of Directors will submit to approval by the General Shareholders’ Meeting:
Allocation of Earnings
Net income for year of 2011 (*)
Distribution:
Interim dividends
Acquisition by the bank of the free allotment rights(**)
Legal reserve
Voluntary reserves
Net income of BBVA, S.A. (Appendix I).
Concerning to the remuneration to shareholders who choose to be pay in cash at the “Dividend Option”.
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According to the criteria established by IAS 33:
Basic earnings per share are determined by dividing the “Net income attributed to Parent Company” by the weighted average number of shares outstanding throughout the year, excluding the average number of treasury sales held over the year.
Diluted earnings per share are calculated by using a method similar to that used to calculate basic earnings per share; the weighted average number of shares outstanding, and the net income attributed to the parent company if appropriate, is adjusted to take into account the potential dilutive effect of certain financial instruments that could generate the issue of new Bank shares (share option commitments with employees, warrants on parent company shares, convertible debt instruments) or for discontinued operations.
The following transactions were carried out in 2011, 2010 and 2009 with an impact in the calculation of basic and diluted earnings per share:
In 2011 and 2010 the Bank has carried out capital increases with pre-emptive subscription rights for former shareholders (see Note 27). According to IAS 33, when calculating the basic and diluted earnings per share all the years prior to the exercise of the rights must be taken into account, and a corrective factor applied to the denominator (the weighted average number of shares outstanding) only in the case of capital increases other than those for conversion of securities into shares. This corrective factor is the result of dividing the fair value per share immediately before the exercise of rights by the theoretical ex-rights fair value per share. For these purposes the basic and diluted earnings per share have been recalculated for 2010 and 2009 as in the following table.
In 2009 and 2011 the Bank issued subordinated securities that were mandatory convertible into ordinary newly issued BBVA shares.
In 2009 the Bank issued subordinated securities that were mandatory convertible into ordinary newly issued BBVA shares amounting to €2,000 million. At its meeting on June 22, 2011, the Board of Directors of BBVA agreed to convert all these bonds dated July 15, 2011 (see Note 27).
On December 30, 2011, the Bank issued subordinate securities that were mandatory convertible into ordinary newly issued BBVA shares amounting to €3,430 million (see Note 23.4).
Since the conversion of both bond issues is mandatory on the date of their final maturity, in accordance with the IAS 33 criteria the following adjustments must be applied to both the calculation of the diluted earnings per share as well as the basic earnings per share:
In the numerator, the net income attributed to the parent company is increased by the amount of the annual coupon of the subordinated convertible bond.
In the denominator, the weighted average number of shares outstanding is increased by the estimated number of shares after the conversion.
Thus, as can be seen in the following table, for 2011, 2010 and 2009 the figures for basic earnings per share and diluted earnings per share are the same, as the dilution effect of the mandatory conversion must also be applied to the calculation of the basic earnings per share.
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The calculation of earnings per share in 2011, 2010 and 2009 is as follows:
Basic and Diluted Earnings per Share
Numerator for basic and diluted earnings per share (millions of euros)
Adjustment: Mandatory convertible bonds interest expenses
Net income adjusted (millions of euros) (A)
Denominator for basic earnings per share (number of shares outstanding)
Weighted average number of shares outstanding (1)
Weighted average number of shares outstanding x corrective factor (2)
Adjustment: Average number of estimated shares to be converted
Adjusted number of shares (B)
Basic earnings per share (Euros per share)A/B
Diluted earnings per share (Euros per share)A/B
‘Weighted average number of shares outstanding (millions of euros), excluded weighted average of treasury shares during the period
Corrective factor, due to the capital increase with pre-emptive subscription right, applied for the previous years.
Data recalculated due to the mentioned corrective factor.
As of December 31, 2011, 2010 and 2009, except for the aforementioned convertible bonds, there were no other financial instruments, share option commitments with employees or discontinued transactions that could potentially affect the calculation of the diluted earnings per share for the years presented.
Business segment reporting represents a basic tool in the oversight and management of the BBVA Group’s various activities. The Group compiles reporting information on as disaggregated a level as possible, and all data relating to the businesses these units manage is recognized in full. These disaggregated units are then amalgamated in accordance with the organizational structure preordained by the Group management into higher level units and, ultimately, the business segments themselves. Similarly, all the incorporated entities making up the BBVA Group are also assigned to the different business segments according to the geographical areas where they carry out their activity.
Once the composition of each of the business areas in the BBVA Group has been defined, certain management criteria are applied, noteworthy among which are the following:
Capital base: Capital is allocated to each business based on capital at risk (CaR) criteria, in turn predicated on unexpected loss at a specific confidence level, determined as a function of the Group’s target capital ratio.
This target solvency level is set on two different scales: strict capital (which conditions the capital provision that is the basis for calculating the return on equity in each business) the second level is total capital (which determines the additional allocation in terms of subordinated debt and preferred securities). The calculation of the CaR combines credit risk, market risk, structural risk associated with the balance sheet, equity positions, operational risk, fixed assets risks and technical risks in the case of insurance companies. Internal models were used that have been defined following the guidelines and requirements established under the Basel II Capital Accord, with economic criteria prevailing over regulatory ones.
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Due to its sensitivity to risk, CaR is an element linked to management policies of the different Group businesses. It makes the capital allocation between them objective and standard, in accordance with the risks incurred, and makes it easier to compare the profitability of the different businesses. In addition, as the CaR is calculated in a way that is standard and integrated for all kinds of risks and for each operation, balance or risk position, the risk-adjusted return can be determined for each business and an aggregate calculated for the return by customer, product, segment, unit or business area.
Internal transfer prices: The calculation of the net interest income of each business is performed by applying the internal transfer rates to both the asset and liability entries. These rates are made up by a market rate (based on the review period for the transaction) and a liquidity premium.
In 2010, the liquidity squeeze in domestic and international financial markets made access to financing by Spanish credit institutions more expensive. BBVA was no exception to the rising cost. As a result, since January 2011 and retroactively for 2010 data, the liquidity premium allocated to the business areas through the reference internal rate system has been modified upwards so that it better reflects the situation of the financial markets. The allocation of profits across business generation and distribution units (e.g., in asset management products) is performed at market prices.
Allocation of operating expenses: Both direct and indirect expenses are allocated to the business areas, except for those items for which there is no clearly defined or close link with the businesses, as they represent corporate or institutional expenses incurred on behalf of the overall Group.
Cross-selling: On certain occasions, adjustments are made to eliminate overlap accounted for in the results of two or more units as result of cross-selling focus.
Description of the BBVA Group’s business segments
Following the acquisition of the stake in the Turkish bank Garanti and its consolidation, started on March 2011, into the accompanying financial statements of the Group, BBVA is beginning to have a relevant presence, in terms of both the balance sheet and income, in Europe and Asia. Furthermore, since the start of the international financial crisis, the importance of geographical location of businesses in order to obtain a better perception of the risks and a better estimate for future growth capacity has been made evident. Finally, new regulations recommend local management of structural risks as a way of avoiding possible contagion between the financial systems of different countries. As a result of the above, in 2011 the Group’s businesses have been restructured into the following business areas:
Spain: This includes:
Retail Network, including the segments of individual customers, private banking, small companies and businesses in the domestic market.
Corporate and Business Banking (CBB), which manages the SME, companies and corporations, public institutions and developer segments.
Corporate and Investment Banking (C&IB), responsible for business with large corporations and multinationals.
Global Markets (GM), which covers treasury and distribution activities on the Spanish market.
Other units, including BBVA Seguros and Asset Management (AM), which manages Spanish mutual fund and pension funds.
Eurasia: This groups together the activity carried out in the rest of Europe and Asia and that in 2010 reported under Spain and Portugal (BBVA Portugal, Consumer Finance Italy and Portugal
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and the retail business of the branches in Paris, London and Brussels), or under Wholesale Banking & Asset Management (WB&AM). Corporate and Investment Banking, Markets, CNCB and CIFH. It also includes the holding in Garanti.
Mexico: Includes the banking, pensions and insurance businesses in the country.
United States: Includes the BBVA Group’s business in the United States and in the Commonwealth of Puerto Rico.
South America: Includes the banking, pensions and insurance businesses in South America.
Finally, the Corporate Activities segment covers all those that are not imputed to the business segments. Basically, it records costs from head offices with a strictly corporate function and makes allocations to corporate and miscellaneous provisions, such as early retirement. It also includes the Financial Management unit, which performs management functions for the Group as a whole, essentially management of asset and liability positions in euro-denominated interest rates and in exchange rates, as well as liquidity and capital management functions, the Industrial and Financial Holdings unit and the Group’s non-international real-estate businesses. The management of structural interest-rate risks in currencies other than the euro is located in the corresponding business areas.
Total Assets by Business Areas
The United States
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The net income and main data in the consolidated income statements for 2011, 2010 and 2009 by business segment is as follows.
Main Results by Business Segments
Net operating income (*)
(*) Gross Income less Administrative Cost and Amortization
Financial institutions that deal in financial instruments must assume or transfer one or more types of risk in their transactions. The main risks associated with financial instruments are:
Credit risk: This arises from the probability that one party to a financial instrument will fail to meet its contractual obligations for reasons of insolvency or inability to pay and cause a financial loss for the other party.
Market risk: This is originated by the likelihood of losses in the value of the positions held as a result of changes in the market prices of financial instruments. It includes three types of risks:
Interest-rate risk: This arises from variations in market interest rates.
Currency risk: This is the risk resulting from variations in foreign-currency exchange rates.
Price risk: This is the risk resulting from variations in market prices, either due to factors specific to the instrument itself, or alternatively to factors which affect all the instruments traded on a specific market.
Liquidity risk: This arises from the possibility that a company cannot meet its payment commitments, or to do so must resort to borrowing funds under onerous conditions, or risking its image and the reputation of the entity.
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Principles and policies –
The aim of the Global Risk Management (GRM) function is to preserve the BBVA Group’s solvency, help define its strategy with respect to risk and assume and facilitate the development of its businesses. Its activity is governed by the following principles:
The risk management function is single, independent and global.
The risks assumed by the Group must be compatible with the capital adequacy target and must be identified, measured and assessed. Risk monitoring and management procedures and sound mechanisms of control and mitigation systems must likewise be in place.
All risks must be managed integrally during their life cycle, and be treated differently depending on their nature and with active portfolio management based on a common measure (economic capital).
It is each business area’s responsibility to propose and maintain its own risk profile, within its autonomy in the corporate action framework (defined as the set of risk control policies and procedures defined by the Group), using an appropriate risk infrastructure to control their risks.
The infrastructures created for risk control must be equipped with means (in terms of people, tools, databases, information systems and procedures) that are sufficient for their purpose, so that there is a clear definition of roles and responsibilities, thus ensuring efficient assignment of resources among the corporate area and the risk units in business areas.
In the light of these principles, the BBVA Group has developed an integrated risk management system that is structured around three main components: a corporate risk governance scheme (with suitable segregation of duties and responsibilities); a set of tools, circuits and procedures that constitute the various risk management regimes; and an internal control system that is appropriate to the nature and size of the risks assumed.
Corporate governance system –
The BBVA Group has developed a system of corporate governance that is in line with the best international practices and adapted it to the requirements of the regulators in the country in which its different units operate.
With respect to the risks assumed by the Group, the Board of Directors of the Bank is responsible for establishing the general principles that define the risk objectives profile of the entities, approving the management policies for control and management of these risks and ensuring regular monitoring of the internal systems of risk information and control. The Board is supported in this function by the Standing Committee and the Risk Committee. The main mission of the latter is to assist the Board in carrying out its functions associated with risk control and management.
According to Article 36 of the Board Regulations, the Risk Committee is assigned the following duties for these purposes:
To analyze and evaluate proposals related to the Group’s risk management and oversight policies and strategies.
To monitor the extent to which the risks actually assumed match the established risk profiles.
To assess and approve, where applicable, any transactions whose size could compromise the Group’s capital adequacy or recurrent earnings, or that present significant potential operational or reputational risks.
To ensure that the Group possesses the means, systems, structures and resources in accordance with best practices to develop its risk management strategy.
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The risk management and control function is distributed among the risk units within the business areas and the Corporate Risk Area, which defines global policy and strategies. The risk units in the business areas propose and manage the risk profiles within their area of autonomy, though they always respect the corporate framework for action.
The Corporate Risk Area combines a vision by risk type with a global vision. It is divided into five units, as follows:
Corporate Risk Management: Responsible for the management and control of credit, market, technical, structural, real estate and non-banking risks.
Validation & Control: Manages the internal control and operational risk systems, the internal validation of the measurement models and the acceptance of new risks.
Technology & Methodologies: Responsible for the management of the technological and methodological developments required for risk management in the Group.
Technical Secretariat: Undertakes technical tests of the proposals made to the Risk Management Committee and the Risk Committee; prepares and promotes the regulations applicable to social and environmental risk management.
This structure gives the Corporate Risk Area reasonable security with respect to:
integration, control and management of all the Group’s risks;
the application throughout the Group of standard principles, policies and metrics; and
the necessary knowledge of each geographical area and each business.
This organizational scheme is complemented by various committees, which include the following:
The Internal Control and Operational Risk Global Committee: Its task is to undertake a review at both Group and business unit level of the control environment and the effectiveness of the operational risk internal control and management systems; as well as to monitor and analyze the main operational risks the Group is subject to, including those that are cross-cutting in nature. This committee is therefore the highest operational risk management body in the Group.
The Global Risk Management Committee: This committee is made up of the risk managers from the risk units located in the business areas and the managers of the Corporate Risk Area units. Among its responsibilities are the following: establishing the Group’s risk strategy (especially as regards policies and structure of this function in the Group), presenting its proposal to the appropriate governing bodies for their approval, monitoring the management and control of risks in the Group and adopting any actions necessary.
The GRM Risk Management Committee: Made up of the corporate directors of the Group’s risk unit and those responsible for risks in the different countries and business areas. It reviews the Group’s risk strategy and the general implementation of the main risk projects and initiatives in the business areas.
The Risk Management Committee: Its permanent members are the Global Risk Management director, the Corporate Risk Management director and the Technical Secretariat. The other committee members propose the operations that are analyzed in its working sessions. The committee analyzes and, if appropriate, authorizes, financial programs and operations within its scope and submits the proposals whose amounts exceed the set limits to the Risks Committee, when its opinion on them is favorable.
The Assets and Liabilities Committee (ALCO): The committee is responsible for actively managing structural interest rate and foreign exchange risk positions, global liquidity and the Group’s capital resources.
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The Technology and Methodologies Committee: The committee decides on the effectiveness of the models and infrastructures developed to manage and control risks that are integrated in the business areas, within the framework of the operational model of Global Risk Management.
The New Products Committee: The committee’s functions are to assess and, if appropriate, to approve the characteristics of new products before they are put on the market; to undertake subsequent control and monitoring for newly authorized products; and to foster business in an orderly way to enable it to develop in a controlled environment.
Tools, circuits and procedures –
The BBVA Group has an established integrated risk management system that meets the needs derived from different types of risk to which it is subject. It is set out in a number of manuals. These manuals provide the measuring tools for the acceptance, assessment and monitoring of risks, define the circuits and procedures applicable to operations by entities and the criteria for their management.
The BBVA Group’s main activities with respect to the management and control of its risks are as follows:
Calculation of exposure to risks of the different portfolios, taking into account any possible mitigating factors (guarantees, balance netting, collaterals, etc.).
Calculation of the probabilities of default (hereinafter, “PD”).
Estimation of the foreseeable losses in each portfolio, assigning a PD to new operations (rating and scoring).
Measurement of the risk values of the portfolios in different scenarios through historical simulations.
Establishment of limits to potential losses according to the different risks incurred.
Determination of the possible impacts of structural risks on the Group’s consolidated income statement.
Determination of limits and alerts to guarantee the Group’s liquidity.
Identification and quantification of operational risks by business lines to make their mitigation easier through the appropriate corrective actions.
Definition of the effective circuits and procedures to achieve established objectives, etc.
Internal control system –
The BBVA Group’s internal control system is based on the best practices developed in “Enterprise Risk Management – Integrated Framework” by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as well as in “Framework for Internal Control Systems in Banking Organizations” by the Bank for International Settlements (BIS).
The Group’s system for internal control is therefore part of the Integral Risk Management Framework. This is the system within the Group that involves its Board of Directors, management and its entire staff. It is designed to identify and manage risks facing the Group entities in such a way as to ensure that the business targets established by the Group’s management are met. The Integrated Risk Management Framework is made up of specialized units (Risks, Compliance, Global Accounting and Management Information, and Legal Services), and the Internal Control, Operational Risk and Internal Audit functions.
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Among the principles underpinning the Internal Control system are the following:
Its core element is the “process.”
The form in which the risks are identified, assessed and mitigated must be unique for each process; and the systems, tools and information flows that support the internal control and operational risk activities must be unique, or at least be administered fully by a single unit.
The responsibility for internal control lies with the Group’s business units, and at a lower level, with each of the entities that make them up. Each business unit’s Internal Control and Operational Risk Management is responsible for implementing the system of control within its scope of responsibility and managing the existing risk by proposing any improvements to processes it considers appropriate.
Given that some business units have a global scope of responsibility, there are cross-cutting control functions which supplement the control mechanisms mentioned earlier.
The Internal Control and Operational Risk Committee in each business unit is responsible for approving suitable mitigation plans for each existing risk or weakness. This committee structure culminates at the Group’s Global Internal Control and Operational Risk Committee.
The specialized units promote policies and draw up internal regulations. It is the responsibility of the Corporate Risk Area to develop them further and apply them.
Risk concentrations –
In the trading area, limits are approved each year by the Board of Directors’ Risk Committee on exposures to trading, structural interest rate, structural exchange rate, equity and liquidity; this applies both to the banking entities and to the asset management, pension and insurance businesses. These limits factor in many variables, including economic capital and earnings volatility criteria, and are reinforced with alert triggers and a stop-loss scheme.
In relation to credit risk, maximum exposure limits are set by customer and country; generic limits are also set for maximum exposure to specific operations or products. Limits are allocated based on iso-risk curves, determined as the sum of maximum foreseeable losses and economic capital, and its ratings-based equivalence in terms of gross nominal exposure.
There is a threshold in terms of a maximum risk concentration level of 10% of Group equity: up to this level the authorization of new risks requires in-depth knowledge of the client, and the markets and sectors in which it operates.
For retail portfolios, potential concentrations of risk in geographical areas or certain risk profiles are analyzed in relation to overall risk and earnings volatility; where appropriate, the mitigating measures considered most appropriate are established.
7.1 Credit risk
7.1.1 Maximum credit risk exposure
The BBVA Group’s maximum credit risk exposure by headings in the balance sheet as of December 31, 2011, 2010 and 2009, is given below. It does not recognize the availability of collateral or other credit enhancements to guarantee compliance with payment obligations. The details are broken down by financial instrument and counterparties.
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In the case of financial assets recognized in the consolidated balance sheets, exposure to credit risk is considered equal to its gross accounting value, not including valuation adjustments (impairment losses, uncollected interest payments, derivatives and others), with the sole exception of trading and hedging derivatives.
The maximum exposure to credit risk on financial guarantees granted is the maximum that the Group would be liable for if these guarantees were called in, and that is their carrying amount.
The information on trading and hedging derivatives set out in the next table is a better reflection of the maximum credit risk exposure than the amounts shown on the consolidated balance sheet because it does not only include the market value on the date of the transactions (the carrying amount only shows this figure); it also estimates the potential risk of these transactions on their due date.
However, credit risk originating from the derivatives in which the Group operates is mitigated through the contractual rights existing for offsetting accounts at the time of their settlement. This has reduced the Group’s exposure to credit risk to €37,817 million as of December 31, 2011 (€27,933 million and €27,026 million as of December 31, 2010 and 2009, respectively).
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Total Financial Assets Risk
Other contingent risks
Total Contingent Risks and Commitments
Total Maximum Credit Exposure
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7.1.2 Mitigation of credit risk, collateralized credit risk and other credit enhancements
In most cases, maximum exposure to credit risk is reduced by collateral, credit enhancements and other actions which mitigate the Group’s exposure. The BBVA Group applies a credit risk hedging and mitigation policy deriving from a banking approach focused on relationship banking. The existence of guarantees could be a necessary but not sufficient instrument for accepting risks, as the assumption of risks by the Group requires the prior verification of the debtor’s capacity for repayment, or that the debtor can generate sufficient resources to allow the amortization of the risk incurred under the agreed terms.
The constitution of guarantees that are adequate, or at any rate generally accepted, for the risk assumed; monetary, secured, personal or hedge guarantees; and finally,
The methods used to value the collateral are in line with the best market practices and imply the use of appraisal of real-estate collateral, the market price in market securities, the trading price of shares in mutual funds, etc. All collaterals assigned must be properly drawn up and entered in the corresponding register. They must also have the approval of the Group’s legal units.
The following is a description of the main types of collateral for each financial instrument class:
Financial instruments held for trading: The guarantees or credit enhancements obtained directly from the issuer or counterparty are implicit in the clauses of the instrument.
Trading and hedging derivatives: In derivatives, credit risk is minimized through contractual netting agreements, where positive- and negative-value derivatives with the same counterparty are offset for their net balance. There may likewise be other kinds of guarantees, depending on counterparty solvency and the nature of the transaction.
The Group trades a wide range of credit derivatives. Through these contracts, the Group either purchases or sells protection on either a single-name or index basis. The Group uses credit derivatives to mitigate credit risk in its loan portfolio and other cash positions and to hedge risks assumed in other market transactions with clients and counterparties.
Credit derivatives can follow different settlement and payment conventions, all of which are in accordance with ISDA standards. The most common types of settlement triggers include bankruptcy of the reference credit entity, acceleration of indebtedness, failure to pay, restructuring, repudiation and dissolution of the entity.
Other financial assets and liabilities designated at fair value through profit or loss and Available-for-sale financial assets: The guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent to the structure of the instrument.
Loans and advances to credit institutions: These usually only have the counterparty’s personal guarantee.
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Loans and advances to customers: Most of these operations are backed by personal guarantees extended by the counterparty. There may also be collateral to secure loans and advances to customers (such as mortgages, cash guarantees, pledged securities and other collateral), or to obtain other credit enhancements (bonds, hedging, etc.).
Debt securities: Guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent to the structure of the instrument.
Held-to-maturity investments: Guarantees or credit enhancements obtained directly from the issuer or counterparty are inherent to the structure of the instrument.
Financial guarantees, other contingent risks and drawable by third parties: These have the counterparty’s personal guarantee.
The Group’s collateralized credit risk as of December 31, 2011, 2010 and 2009, excluding balances deemed impaired, is broken down in the table below:
Refers to loans which are secured with real estate properties (other than residential properties) in respect of which we provide financing to the borrower to buy or to construct such properties.
Includes loans which collateral is cash, other financial assets or partial guarantees.
7.1.3 Credit quality of financial assets that are neither past due nor impaired
The BBVA Group has tools (“scoring” and “rating”) that enable it to rank the credit quality of its operations and customers based on an assessment and its correspondence with the probability of default (“PD”) scales. To analyze the performance of PD, the Group has a series of tracking tools and historical databases that collect the pertinent information generated internally, which can basically be grouped together in scoring and rating models.
Scoring is a decision-making model that contributes to both the arrangement and management of retail loans: consumer loans, mortgages, credit cards for individuals, etc. Scoring is the tool used to decide to whom a loan should be assigned, what amount should be assigned and what strategies can help establish the price, because it is an algorithm that sorts transactions by their credit quality. This algorithm enables the BBVA Group to assign a score to each transaction requested by a customer, on the basis of a series of objective characteristics that have statistically been shown to discriminate between the quality and risk of this type of transactions. The advantage of scoring lies in its simplicity and homogeneity: all that is needed is a series of objective data for each customer, and this data is analyzed automatically using an algorithm.
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There are three types of scoring, based on the information used and on its purpose:
Rating tools, as opposed to scoring tools, do not assess transactions but focus on the rating of customers instead: companies, corporations, SMEs, public authorities, etc. A rating tool is an instrument that, based on a detailed financial study, helps determine a customer’s ability to meet his/her financial obligations. The final rating is usually a combination of various factors: on the one hand, quantitative factors, and on the other hand, qualitative factors. It is a middle road between an individual analysis and a statistical analysis.
For portfolios where the number of defaults is very low (sovereign risk, corporates, financial entities, etc.) the internal information is supplemented by “benchmarking” of the external rating agencies (Moody’s, Standard & Poor’s and Fitch). To this end, each year the PDs compiled by the rating agencies at each level of risk rating are compared, and the measurements compiled by the various agencies are mapped against those of the BBVA master rating scale.
Once the default probability of a transaction or customer has been calculated, a “business cycle adjustment” is carried out. This is a means of establishing a measure of risk that goes beyond the time of its calculation. The aim is to capture representative information of the behavior of portfolios over a complete economic cycle. This probability is linked to the Master Rating Scale prepared by the BBVA Group to enable uniform classification of the Group’s various asset risk portfolios.
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The table below shows the abridged scale used to classify the BBVA Group’s outstanding risk as of December 31, 2011:
Internal rating
Reduced List (17 groups)
The table below outlines the distribution of exposure, including derivatives, by internal ratings, to corporates, financial entities and institutions (excluding sovereign risk), of the BBVA Group’s main entities as of December 31, 2011:
From all the possible range of transactions/customers with a credit rating, and therefore with a probability of default, homogeneous probability levels are established to classify the portfolio. The concentration of levels will be higher when more discrimination is needed and lower when discrimination is not so important. These levels represent the ratings needed to ensure proper classification of the portfolio.
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These different values and their probability of default (PD) limits have been determined using as a reference the rating scales and default rates applied by the external agencies Standard & Poor’s and Moody’s. Thus, the PD levels for the BBVA Group’s Master Rating Scale are established. Although this scale is common to the entire Group, the calibrations (mapping scores to PD sections/Master Rating Scale levels) are carried out at tool level for each country in which the Group has tools available.
7.1.4 Policies for preventing excessive risk concentration
In order to prevent the build-up of excessive concentrations of credit risk at the individual, country and sector levels, the BBVA Group maintains maximum permitted risk concentration indices updated at individual and portfolio sector levels tied to the various observable variables within the field of credit risk management. The limit on the Group’s exposure or financial commitment to a specific customer therefore depends on the customer’s credit rating, the nature of the risks involved, and the Group’s presence in a given market, based on the following guidelines:
The aim is, as far as possible, to combine the customer’s credit needs (commercial/financial, short-term/long-term, etc.) with the interests of the Group.
Any legal limits that may exist concerning risk concentration are taken into account (relationship between risks with a customer and the capital of the entity that assumes them), the markets, the macroeconomic situation, etc.
To undertake a proper management of risk concentration, and if necessary generate actions on such risks, a number of different levels of monitoring have been established according to the amount of global risks maintained with the same customer. Any risk concentrations with the same customer or group may generate losses of more than €18 million are authorized and monitored by the Risk Committee of the Bank’s Board of Directors. In terms of exposure, this amount is equivalent to 10% of the BBVA Group’s eligible capital for a customer with an AAA credit rating and 1% for a customer with a BB credit rating.
7.1.5 Sovereign risk exposure
Sovereign risk management
The risk associated with the transactions involving sovereign risk is identified, measured, controlled and tracked by a centralized unit integrated in the Group’s Risk Area. Its basic functions involve the preparation of individual reports on the countries where sovereign risk exists (called “financial programs”), tracking such risks, assigning ratings to these countries and, in general, supporting the Group in terms of providing information related to transactions involving sovereign risk. The risk policies established in the financial programs are approved by the relevant risk committees.
The country risk unit tracks the evolution of the risks associated with the various countries to which we are exposed (including sovereign risk) on an ongoing basis in order to adapt its risk and mitigation policies to any macroeconomic and political changes that may occur. Moreover, it regularly updates its internal ratings and forecasts for these countries. The internal rating assignment methodology is based on the assessment of quantitative and qualitative parameters which are in line with those used by certain multilateral organizations (such as the International Monetary Fund and the World Bank), rating agencies and export credit organizations.
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The table below provides a breakdown of our financial instruments, as of December 31, 2011, by type of counterparty and the country of residence of such counterparty. The below figures do not take into account valuation adjustments, impairment losses or loan loss provisions (see Note 7.1.7).
Risk Exposure by Country
Greece
Rest of countries
Total Rest of countries
Total Exposure to Financial Instruments
In addition, there were undrawn lines of credit, granted mainly to Spanish public authorities, amounting to€3,525 million. For more information about drawable lines of credit see Note 34.
Relates mainly to government debt securities held by the Group in countries where we operate. These securities are used by the Group’s Assets and Liabilities Committee (ALCO) to manage the interest-rate risk concerning the balance sheet of our subsidiaries located in such countries and by our insurance subsidiaries for managing risks related to pension and insurance commitments.
Sovereign risk exposure in Europe
The European sovereign debt crisis deepened in 2011. Contagion of the financial tension during the year extended, first, to countries in the European periphery that were not subject to bailout programs, such as Italy and Spain; and subsequently, as doubts increased about the capacity of governments in the euro zone to resolve the crisis, to certain core countries in Europe with sounder finances.
As for the sovereign risk of European countries, despite the agreements reached at the European summit held at the end of July 2011, sovereign debt markets, including those in Spain, and especially those in Italy, continue to be subject to intense pressure.
As part of the exercise carried out by the European Banking Authority (EBA) to assess the minimum capital levels of European banking groups, as defined in the European Union’s Capital Requirement Directive (CRD), certain information on the exposure of the Group’s credit institutions to European sovereign risk as of September 30, 2011 was published on December 8, 2011. The table below provides a breakdown of the exposure of the Group’s credit institutions to European sovereign risk as of December 31, 2011, by type of financial instrument and the country of residence of the counterparty. The below figures do not take into account valuation adjustments, impairment losses or loan loss provisions (see “Valuation and impairment methods” below).
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Exposure toSovereign Risk byEuropean UnionCountry (1)
Hungary
Total Exposure to Sovereign Counterparties (European Union) (1)
This table shows the exposure to sovereign risk pursuant to EBA criteria. Therefore, exposure to Turkey (€3,414 million) and exposure of the Group insurance companies (€3,972 million) are not included.
Includes Credit Derivative Swaps (CDS), which are reflected at their fair value.
The table below provides a breakdown of the notional value of the CDS in which the Group’s credit institutions acted as sellers or buyers of protection against sovereign risks in European countries, based on the country whose risk is covered by the CDS. The main counterparties of these CDS are credit institutions with a high credit quality. The CDS contracts we enter contain market standards clauses, including with respect to the events that would trigger payouts under the contracts.
Exposure toSovereign Risk byEuropean Union Country
Total Exposure to Sovereign Counterparties (European Union)
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As reflected in the tables reproduced above, our exposure to sovereign risk in Europe relates mainly to Spain and Italy. The table below provides a breakdown of the total exposure faced by the Group’s credit institutions to these two countries as of December 31, 2011, by type of financial instrument and the country of residence of the counterparty, based on the maturity of the financial instruments.
Maturities
Up to 1 Year
1 to 5 Years
Over 5 Years
Valuation and impairment methods
The valuation methods used to assess the instruments that are subject to sovereign risks are the same ones used for other instruments included in the relevant portfolios and are detailed in Note 8 to our Consolidated Financial Statements. We take into account the exceptional circumstances that have taken place over the last two years in connection with the sovereign debt crisis in Europe. Specifically, the fair value of sovereign debt securities of European countries has been considered equivalent to their listed price in active markets, except for Greek sovereign debt securities. With regard to sovereign debt securities issued by Greece, owing to its economic situation and considering the various agreements reached at the summits of European leaders on the plan for restructuring Greek sovereign debt, the Group has recognized impairment losses on these assets for a total amount of €81 million, applying an expected loss of 50% of the nominal value of the Greek sovereign debt, irrespective of its maturity. This impairment has been estimated by considering the recommendations issued by the European Securities and Markets Authority (ESMA). These impairment losses were charged to our consolidated income statement for the year ended December 31, 2011.
Reclassification of securities between portfolios
Note 14 describes the reclassification carried out in the third quarter of 2011, in accordance with IFRS-7, amounting to €1,817 million in sovereign debt securities issued by Italy, Greece and Portugal from the heading “Available-for-sale financial assets” to the heading “Held-to-maturity investments” of the consolidated balance sheet.
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7.1.6 Financial assets past due but not impaired
The table below provides details of financial assets past due as of December 31, 2011, 2010 and 2009, but not considered to be impaired, listed by their first past-due date:
Financial Assets Past Due but Not Impaired 2011
Financial Assets Past Due but Not Impaired 2010
Financial Assets Past Due but Not Impaired 2009
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7.1.7 Impaired assets and impairment losses
The table below shows the composition of the impaired financial assets and risks as of December 31, 2011, 2010 and 2009, broken down by heading in the accompanying consolidated balance sheet:
Impaired Risks.
Breakdown by Type of Asset and by Sector
Asset Instruments Impaired
Total ‘Asset Instruments Impaired (1)
Contingent Risks Impaired
Contingent Risks Impaired (2)
Total impaired risks (1) + (2)
Changes in Impaired Financial Assets and Contingent Risks
Additions (1)
Recoveries (2)
Net additions (1)+(2)
Recoveries on entries (%)
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Impaired Assets by Geographic Area and Time SinceOldest Past-Due Amount 2011
South América
Impaired Assets by Geographic Area and Time SinceOldest Past-Due Amount 2010
Below are details of the impaired financial assets as on December 31, 2011 and 2010, classified by type of loan in accordance with its associated guarantee, and by the time since their oldest past-due amount or the period since they were deemed impaired:
Impaired Assets by Type of Guarantees and Time SinceOldest Past-Due Amount 2011
Other than those currently use as a family residential property of the borrower
Plots and other real state assets
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Impaired Assets by Type of Guarantees and Time SinceOldest Past-Due Amount 2010
Rest of residential mortgage
Below is the accumulated financial income accrued as of 31 December 2011, 2010 and 2009 with origin in the impaired assets that, as mentioned above in Note 2.2.1, are not recognized in the accompanying consolidated income statements as there are doubts as to the possibility of collection:
Financial Income from Impaired Assets
As of December 31, 2011, 2010 and 2009, the non-performing loan and coverage ratios (see Glossary) of the transactions registered under the “Loans and advances to customers” and “Contingent risk” headings of the accompanying consolidated balance sheets were:
BBVA Group Ratios
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7.1.8 Impairment losses
Below is a breakdown of the provisions recorded on the accompanying consolidated balance sheets to cover estimated impairment losses as of December 31, 2011, 2010 and 2009 in financial assets and contingent risks, according to the different headings under which they are classified in the accompanying consolidated balance sheet:
Impairment losses and provisions for contingent risks
Provisions for Contingent Risks and Commitments
Below are the changes in 2011 and 2010 in the estimated impairment losses, broken down by the headings in the accompanying consolidated balance sheet:
Including the impairment losses on financial assets (Note 49) and the provisions for contingent risks (Note 48)
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The changes in 2011, 2010 and 2009 in financial assets derecognized from the accompanying consolidated balance sheet as their recovery is considered unlikely (hereinafter “write-offs”) is shown below:
Changes in Impaired Financial Assets Written-Off from the Balance Sheet
Increase:
Decrease:
Expiry and other causes
As indicated in Note 2.2.1, although they have been derecognized from the balance sheet, the BBVA Group continues to attempt to collect on these write-offs, until the rights to receive them are fully extinguished, either because it is time-barred debt, the debt is forgiven, or other reasons.
7.2 Market risk
As well as the most common market risks (mentioned earlier), other market risks have to be considered for the administration of certain positions: credit spread risk, basis risk, volatility and correlation risk.
Value at Risk (VaR) is the basic measure to manage and control the BBVA Group’s market risks. It estimates the maximum loss, with a given confidence level, that can be produced in market positions of a portfolio within a given time horizon. VaR is calculated in the Group at a 99% confidence level and a 1-day time horizon.
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BBVA and BBVA Bancomer have received approval from the Bank of Spain to use a model developed by the BBVA Group to calculate bank capital requirements for market risk. This model estimates VaR in accordance with the “historical simulation” methodology, which consists of estimating the losses or gains that would have been produced in the current portfolio if the changes in market conditions occurring over a specific period of time were repeated. Using this information, it infers the maximum foreseeable loss in the current portfolio with a determined level of confidence. It presents the advantage of precisely reflecting the historical distribution of the market variables and not requiring any assumption of specific probability distribution. The historical period used in this model is two years.
In addition, the Bank follows the guidelines set out by Spanish and European authorities regarding other metrics to meet the Bank of Spain’s regulatory requirements. The new measurements of market risk for the trading portfolio include the calculation of stressed VaR (which quantifies the level of risk in extreme historical situations) and the quantification of default risks and downgrading of credit ratings of bonds and credit portfolio derivatives.
The limit structure of the BBVA Group’s market risk determines a system of VaR and economic capital limits by market risk for each business unit, with specific ad-hoc sub-limits by type of risk, activity and trading desk.
Validity tests are performed periodically on the risk measurement models used by the Group. They estimate the maximum loss that could have been incurred in the positions assessed with a certain level of probability (backtesting), as well as measurements of the impact of extreme market events on risk positions (stress testing). In addition, BBVA Research (the BBVA Group’s Research Department) carries out stress analysis by simulating historical crisis scenarios and evaluating the impacts resulting from profound market alterations.
Trends in market risk in 2011 –
The changes in the BBVA Group’s market risk in 2011, measured as VaR without smoothing (see Glossary) with a 99% confidence level and a 1-day horizon are as follows:
This represents a daily average VaR of €24 million in 2011, compared with €33 million in 2010 and €26 million in 2009. The number of risk factors currently used to measure portfolio risk is around 2,200. This number varies according to the possibility of doing business with other underlying assets and in other markets.
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As of December 31, 2011, 2010 and 2009, VaR amounted to €18 million,€28 million and€31 million, respectively. These figures can be broken down as follows:
VaR by Risk Factor
Diversification effect (*)
VaR medium in the period
The diversification effect is the difference between the sum of the average individual risk factors and the total VaR figure that includes the implied correlation between all the variables and scenarios used in the measurement.
The stress testing is carried out using historical crisis scenarios and economic scenarios supplied by BBVA Research as a base:
Historical scenarios: The base historical scenario is the collapse of Lehman Brothers in 2008.
Economic crisis scenarios: Unlike the historical scenarios, economic stress scenarios are updated monthly. The decision about which of the scenarios should be used is taken by the Market Stress Committee, in which BBVA Research takes an active part through the construction of ad hoc scenarios. The fundamental aim of this committee is to identify the most significant market risk positions in each of the BBVA Group’s treasuries and assess the impact of changes in their risk drivers. To do so, the Stress Committee must identify and quantify unlikely but plausible crisis scenarios in the financial markets. This is achieved thanks to the participation of BBVA Research as a key member of the Committee. In addition, the economic stress scenarios are designed individually and are coherent with the positions of each of the treasuries. As a result, there may be no coherence at Group level and thus the impacts cannot be aggregated.
By type of market risk assumed by the Group’s trading portfolio, as of December 31, the main risks were interest rate and credit spread risks, which fell by €3 million on the figure for December 31, 2010. Equity risk increased by €3 million, while currency risk and volatility and correlation risk fell by €0.1 million and€8 million respectively.
The changes in the average daily VaR ratio in 2011 with respect to 2010 is basically the result of Global Market Europe reducing its average risk by 24% in 2011 (with a daily average VaR of €16 million) and, to a lesser extent, because Global Market Bancomer cut its risk by 39% (with a daily average VaR in 2011 of €5 million).
The internal market risk model is validated periodically by back testing. In 2011, portfolio losses in BBVA SA were higher than daily VaR on 3 occasions (2 in the case of BBVA Bancomer). This number of exceptions is within the bands set in the tests used in the Basel model. This is why no significant changes have been made either to the methodology of measurement, nor to the parametrics of the current measurement model.
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Structural interest-rate risk –
The aim of on-balance-sheet interest rate risk management is to maintain the BBVA Group’s exposure to market interest-rate fluctuations at levels in keeping with its risk strategy and profile. In pursuance of this, the Assets and Liabilities Committee (ALCO) undertakes active balance sheet management through operations intended to optimize the levels of risk borne according to expected earnings and respect the maximum levels of accepted risk.
ALCO uses the interest-rate risk measurements performed by the Risk Area. Acting as an independent unit, the Risk Area periodically quantifies the impact that a variation of 100 basis points in market interest rates would have on the BBVA Group’s net interest income and economic value.
In addition, the Group performs probability calculations that determine the economic capital (maximum loss of economic value) and risk margin (maximum estimated loss of operating income) originating from structural interest rate risk in banking activity (excluding the Treasury area), based on interest rate curve simulation models. The Group regularly performs stress tests and sensitivity analyses to complement its assessment of its interest-rate risk profile.
All these risk measurements are subsequently analyzed and monitored. The levels of risk assumed and the degree of compliance with the limits authorized by the Executive Committee are reported to the various managing bodies of the BBVA Group.
Below are the average interest-rate risk exposure levels in terms of sensitivity of the main financial institutions in the BBVA Group in 2011:
Sensitivity to interest-rate analysis 2011
BBVA Bancomer
BBVA Compass
BBVA Puerto Rico
BBVA Chile
BBVA Colombia
BBVA Banco Continental
BBVA Banco Provincial
BBVA Banco Francés
Percentage relating to “1 year” net Interest margin forecast in each unit.
Percentage relating to each unit’s Equity
As part of the measurement process, the BBVA Group has established the assumptions regarding the movement and behavior of certain items, such as those relating to products with no explicit or contractual maturity. These assumptions are based on studies that estimate the relationship between the interest rates on these products and market rates. They enable specific balances to be classified into trend-based balances (long-term) and seasonal or volatile balances (short-term residual maturity).
Structural currency risk –
Structural currency risk is basically caused by exposure to variations in currency exchange rates that arise in the BBVA Group’s foreign subsidiaries and the provision of funds to foreign branches financed in a different currency to that of the investment.
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ALCO is the body responsible for arranging hedging transactions to limit the capital impact of fluctuations in exchange rates, based on their projected trend, and to guarantee the equivalent euro value of the foreign currency earnings expected to be obtained from these investments.
Structural currency risk management is based on the measurements performed by the Risk Area. These measurements use an exchange-rate scenario simulation model which quantifies possible changes in value for a given confidence interval and a pre-established time horizon. The Standing Committee authorizes the system of limits and alerts for these risk measurements, which include a sub-limit on the economic capital (an unexpected loss arising from the currency risk of investments financed in foreign currency).
In 2011, the average asset exposure sensitivity to a 1% depreciation in exchange rates stood at €154 million, with 37% in the Mexican peso, 23% in South American currencies, 20% in Asian and Turkish currencies, and 18% in the US dollar.
Structural equity risk –
The BBVA Group’s exposure to structural equity risk is basically derived from investments in industrial and financial companies with medium- and long-term investment horizons. This exposure is mitigated through net short positions held in derivatives of their underlying assets, used to limit portfolio sensitivity to potential falls in prices.
The aggregate sensitivity of the BBVA Group’s consolidated equity to a 1% fall in the price of shares stood at €-39.4 million as of December 31, 2011, and its impact on consolidated earnings for the year is estimated at €1.8 million. These figures are estimated taking into account the exposure in shares valued at market prices, or if not applicable, at fair value (except for the positions in the Treasury Area portfolios) and the net delta-equivalent positions in options on their underlyings.
The Risk Area is responsible for measuring and effectively monitoring structural risk in the equity portfolio. To do so, it estimates the sensitivity figures and the capital necessary to cover possible unexpected losses due to the variations in the value of the companies making up the Group’s equity portfolio, at a confidence level that corresponds to the institution’s target rating, and taking into account the liquidity of the positions and the statistical performance of the assets under consideration. These figures are supplemented by periodic stress tests, back-testing and scenario analyses.
7.3 Liquidity risk
The aim of liquidity risk management, tracking and control is to ensure, in the short term, that the payment commitments of the BBVA Group entities can be duly met without having to resort to borrowing funds under burdensome terms, or damaging the image and reputation of the entities. In the medium term the aim is to ensure that the Group’s financing structure is ideal and that it is moving in the right direction with respect to the economic situation, the markets and regulatory changes.
Management of liquidity and structural finance within the BBVA Group is based on the principle of financial autonomy of the entities that make it up. This approach helps prevent and limit liquidity risk by reducing the Group’s vulnerability in periods of high risk.
The management and monitoring of liquidity risk is carried out comprehensively in each of the BBVA Group’s business units using a double (short and long-term) approach. The short-term liquidity approach has a time horizon of up to 366 days. It is focused on the management of payments and collections from the Treasury and market activity, and includes operations specific to the area and the Bank’s possible liquidity requirements. The medium-term approach is focused on financial management of the whole consolidated balance sheet, with a time horizon of one year or more.
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The ALCO within each management unit is responsible for the comprehensive management of liquidity. The Financial Management unit, as part of the Financial Division, analyzes the implications of the Bank’s various projects in terms of finance and liquidity and its compatibility with the target financing structure and the situation of the financial markets. The Financial Management unit executes the resolutions agreed by ALCO in accordance with the agreed budgets and manages liquidity risk using a broad scheme of limits, sub-limits and alerts approved by the Standing Committee. The Risk Area measures and controls these limits independently and provides the managers with support tools and metrics needed for decision-making.
Each of the local risk areas, which are independent from the local manager, complies with the corporative principles of liquidity risk control established by GRM, the Global Unit in charge of Structural Risks for the entire BBVA Group.
At the level of each BBVA Group entity, the managing areas request and propose a scheme of quantitative and qualitative limits and alerts related to short and medium term liquidity risks. Once agreed with GRM, controls and limits are proposed to the Bank’s Board of Directors (through its delegate bodies), for approval at least once a year. The proposals submitted by GRM are adapted to the situation of the markets according to the risk tolerance level aimed for by the Group.
The development of a new Liquidity and Finance Manual demanded strict adjustment of liquidity risk management in terms of limits, sub-limits and alerts, as well as in procedures. In accordance with the manual, GRM carries out regular measurements of risk incurred and monitors the consumption of limits. It develops management tools and adapts valuation models, carries out regular stress tests and reports on the liquidity risk levels to ALCO and the Group’s Management Committee on a monthly basis. Its reports to the management areas and GRM Management Committee are more frequent.
Under the current Contingency Plan, the frequency of communication and the nature of information provided is decided by the Liquidity Committee at the proposal of the Technical Liquidity Group (TLG). In the event of any alert or possible crisis, the TLG carries out an initial analysis of the liquidity situation (short or long term) of the entity affected.
The TLG is made up of specialized staff from the Short-Term Cash Desk, the Global Accounting & Information Management (GA&IM), the Financial Management and the Structural Risk areas. If the alert signals established make clear that a critical situation has arisen, the TLG informs the Liquidity Committee (made up of managers of the corresponding areas). The Liquidity Committee is responsible for calling the Financing Committee, if appropriate, which is made up of the Group’s President and COO and the managers from the Financial Area, the Risk Area, Global Business and the Business Area of the country affected.
One of the most significant aspects that have affected the BBVA Group in 2011 was the continuation of the sovereign debt crisis, which started in 2010. The role played by official bodies in the euro zone and the ECB have been key in calming the markets and ensuring liquidity in the European banking system. However, the Group has not had to make use of the extraordinary measures established by the Spanish authorities to mitigate the liquidity tension affecting many Spanish banks.
Given this situation, the regulators have established new regulatory requirements with the aim of strengthening the balance sheets of banks and making them more resistant to potential short-term liquidity shocks. The Liquidity Coverage Ratio (LCR) is the metric proposed by the Bank Supervisory Committee of the Bank for International Settlements in Basel to achieve this objective. It aims to ensure that financial institutions have a sufficient stock of liquid assets to allow them to survive a 30-day liquidity stress scenario. According to the most recent document published by the Basel Committee on Bank Supervision in December 2010, this ratio will remain subject to revision by the regulating bodies until mid-2013, and it will be incorporated as a regulatory requirement on January 1, 2015, though it must be reported to supervisory bodies as of January 2012.
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Although the precise definition of these new ratios has still not been decided, the BBVA Group has outlined a plan to adapt to them. This will allow it to adopt best practices and the most effective and strict criteria for their implementation sufficiently in advance.
7.4 Risk concentrations
Below is a breakdown of the balances of financial instruments registered in the accompanying consolidated balance sheets by their concentration in geographical areas and according to the residence of the customer or counterparty. It does not take into account valuation adjustments, impairment losses or loan-loss provisions:
Risks by Geographical Areas 2011
Financial assets –
Total Risk in Financial Assets
Contingent risks and commitments
Contingent risks
Contingent commitments
Total Contingent Risk
Total Risks in Financial Instruments
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Risks by Geographical Areas 2010
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Risks by Geographical Areas 2009
The breakdown of the main figures in the most significant foreign currencies in the accompanying consolidated balance sheets is set forth in Appendix IX.
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7.5 Residual maturity
Below is a breakdown by contractual maturity of the balances of certain headings in the accompanying consolidated balance sheets, disregarding any valuation adjustments or impairment losses:
Contractual Maturities
Asset –
Liabilities –
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Contractual Maturities2010
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Contractual Maturities2009
The fair value of a financial asset or a liability on a given date is the amount for which it could be exchanged or settled, respectively, on that date between two knowledgeable, willing parties in an arm’s length transaction under market conditions. The most objective and common reference for the fair value of a financial asset or a liability is the price that would be paid for it on an organized, transparent and deep market (“quoted price” or “market price”).
If there is no market price for a given financial asset or liability, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments; or, in the absence thereof, by using mathematical measurement models that are sufficiently tried and trusted by the international financial community. The estimates used in such models take into consideration the specific features of the asset or liability to be measured and, in particular, the various types of risk associated with the asset or liability. However, the limitations inherent in the measurement models and possible inaccuracies in the assumptions and parameters required by these models may mean that the estimated fair value of an asset or liability does not coincide exactly with the price for which the asset or liability could be exchanged or settled on the date of its measurement.
The fair value of the financial derivatives included in the held for trading portfolios is assimilated to their daily quoted price if there is an active market for these financial instruments. If for any reason their quoted price cannot be established on a given date, these derivatives are measured using methods similar to those used in over-the-counter (“OTC”) markets.
The fair value of OTC derivatives (“present value” or “theoretical price”) is equal to the sum of future cash flows arising from the instrument, discounted at the measurement date; these derivatives are valued using methods recognized by international financial markets: the “net present value” (NPV) method, option price calculation models, etc.
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Determining the fair value of financial instruments –
Below is a comparison of the carrying amount of the Group’s financial assets and liabilities in the accompanying consolidated balance sheets and their respective fair values:
Fair Value and Carrying Amount
ASSETS –
Fair value changes of the hedges items in portfolio hedges of interest rate risk
LIABILITIES –
Fair value changes of the hedged items in portfolio hedges of interest rate risk.
In the case of financial instruments whose carrying amount is not the same as their theoretical fair value, the fair value has been calculated in the following manner:
The fair value of “Cash and balances with central banks” has been considered equivalent to its carrying amount, because they are mainly short-term balances.
The fair value of “Held-to-maturity investments” is equivalent to their quoted price in active markets.
The fair values of “Loans and receivables” and “Financial liabilities at amortized cost” have been estimated by discounting estimated future cash flows using the market interest rates prevailing at each year-end.
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The “Fair value changes of the hedged items in portfolio hedges of interest-rate risk” item in the accompanying consolidated balance sheets registers the difference between the carrying amount of the hedged deposits lent, registered under “Loans and Receivables,” and the fair value calculated using internal models and observable variables of market data (see Note 15).
For financial instruments whose carrying amount is equivalent to their fair value, the measurement processes used are set forth below:
Level 1: Measurement using market observable quoted prices for the financial instrument in question, secured from independent sources and linked to active markets. This level includes listed debt securities, listed equity instruments, some derivatives and mutual funds.
Level 2: Measurement that applies techniques using inputs drawn from observable market data.
Level 3: Measurement using techniques, where some of the inputs are not taken from market observable data. As of December 31, 2011, the affected instruments accounted for approximately 0.31% of financial assets and 0.004% of the Group’s financial liabilities. Model selection and validation was undertaken by control areas outside the market units.
The following table shows the main financial instruments carried at fair value in the accompanying consolidated balance sheets, broken down by the measurement technique used to determine their fair value:
Fair Value by Levels
The heading “Available-for-sale-financial assets” in the accompanying consolidated balance sheets as of December 31, 2011, 2010 and 2009, additionally includes €541 million,€499 million and€589 million, respectively, accounted for at cost, as indicated in the section of this Note entitled “Financial instruments at cost”.
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The following table sets forth the main measurement techniques, hypotheses and inputs used in the estimation of fair value of the financial instruments classified under Levels 2 and 3, based on the type of financial asset and liability and the corresponding balances as of December 31, 2011:
FinancialInstruments Level 2
Measurement techniques
Main assumptions
Main inputs used
Fair value (millions of euros)
Trading portfolio
¡ Debt securities
Calculation of the present value of financial instruments as the current value of future cash flows (discounted at market interest rates), taking into account:
• the estimate of prepayment rates;
• the issuer credit risk; and
• current market interest rates.
• Net Asset Value (NAV) published recurrently, but not more frequently than every quarter.
• Risk premiums.
• Observable market interest rates
¡Equity instruments
For share, currency, inflation or commodityderivatives:
• The Black-Scholes assumptions take into account
possible convexity adjustments
• Forward structure of the underlying asset.
• Volatility of options.
• Black-Scholes assumptions apply a lognormal process for forward rates and consider possible convexity adjustments.
• Observable correlations between underlying assets.
For share, currency,
or commodity derivatives:
• Monte Carlo simulations.
Local volatility model: assumes a constant diffusion of the underlying asset with the volatility depending on the value of the underlying asset and the term.
¡ Derivatives
• The term structure of interest rates.
• Black-Derman-Toy Model, Libor Market Model and SABR.
• HW 1 factor
This model assumes that:
• The forward rates in the term structure of the interest rate curve are perfectly correlated
• Volatility of underlying asset.
For credit derivatives:
• Diffusion models.
These models assume a constant diffusion of default intensity.
• Credit default swap (CDS) prices.
• Historical CDS volatility.
Determining the current value of financial instruments as the current value of future cash flows (discounted at market interest rates), taking into account:
• estimate of prepayment rates;
• issuer credit risk; and
• Present-value method.
• “Time default” model for financial instruments in the collateralized debt obligations (CDOs) family.
In the case of measurement of asset-backed securities (ABSs), future prepayments are calculated on the conditional prepayment rates that the issuers themselves provide.
• Prepayment rates
• Default correlation
• Credit spread (1)
The “time-to-default” model is used to measure default probability. One of the main variables used is the correlation of defaults extrapolated from several index tranches (ITRA00 and CDX) with the underlying portfolio of our CDOs.
Net asset value (NAV) for hedge fund and for equity
instruments listed in thin or less active markets.
• NAV supplied by the fund manager or issuer of the securities.
Trading derivatives for interest-rate futures and forwards:
• “Libor Market” model.
The “Libor Market” model models the complete term structure of the interest-rate curve, assuming a constant elasticity of variance (CEV) lognormal process. The CEV lognormal process is used to measure the presence of a volatility shift.
• Correlation decay.(2)
¡ Trading derivatives
• Monte Carlo simulations
• Numerical integration
• Heston
The options are measured through generally accepted valuation models, to which the observed implied volatility is added.
• Vol-of-Vol (3)
• Reversion factor (4)
• Volatility Spot Correlation (5)
• Credit baskets
• Default correlation.
• Historical CDS volatility
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Credit spread: The spread between the interest rate of a risk-free asset (e.g. Treasury securities) and the interest rate of any other security that is identical in every respect except for asset quality. Spreads are considered as Level 3 inputs when referring to illiquid securities, based on spreads of similar issuers.
Correlation decay: This is the factor that allows us to calculate changes in correlation between the different pairs of forward rates.
Vol-of-Vol: Volatility of implied volatility. This is a statistical measure of the changes of the spot volatility.
Reversion Factor: The speed with which volatility reverts to its natural value.
Volatility- Spot Correlation: A statistical measure of the linear relationship (correlation) between the spot price of a security and its volatility.
The changes in the balance of Level 3 financial assets and liabilities included in the accompanying consolidated balance sheets are as follows:
Financial Assets Level 3Changes in the Period
Valuation adjustments recognized in the income statement (*)
Valuation adjustments not recognized in the income statement
Acquisitions, disposals and liquidations
Net transfers to Level 3
Profit or loss that are attributable to gains or losses relating to those assets and liabilities held at the end of the reporting period
The financial instruments transferred between the different levels of measurement in 2011 are at the following amounts in the accompanying consolidated balance sheets as of December 31, 2011:
Transfer between levels
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As of December 31, 2011, the effect on the consolidated income and consolidated equity of changing the main hypotheses used for the measurement of Level 3 financial instruments for other reasonably possible models, taking the highest (most favorable hypotheses) or lowest (least favorable) value of the range deemed probable, would be as follows:
Financial Assets Level 3
Sensitivity Analysis
Loans and financial liabilities at fair value through profit or loss –
As of December 31, 2011, 2010 and 2009, there were no loans or financial liabilities at fair value other than those recognized under the headings “Other financial assets designated at fair value through profit and loss” and “Other financial liabilities designated at fair value through profit and loss” in the accompanying consolidated balance sheets.
Financial instruments at cost –
As of December 31, 2011, 2010 and 2009, equity instruments, derivatives with these equity instruments as underlyings, and certain discretionary profit-sharing arrangements in some companies, were recognized at cost in the Group’s consolidated balance sheets because their fair value could not be reliably determined, as they are not traded in organized markets and thus their unobservable inputs are significant. On the above dates, the balance of these financial instruments recognized in the portfolio of available-for-sale financial assets amounted to €541 million,€499 million and€589 million, respectively.
The table below outlines the financial assets and liabilities carried at cost that were sold in 2011, 2010 and 2009:
Sales of financial instruments at cost
Amount of Sale
Carrying Amount at Sale Date
Gains/Losses
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The breakdown of the balance under the headings “Cash and balances with central banks” and “Financial liabilities at amortized cost – Deposits from central banks” in the accompanying consolidated balance sheets is as follows:
Cash and Balances with Central Banks
Balances at the Central Banks
Reverse repurchase agreements
Accrued interests
Repurchase agreements
Accrued interest until expiration
10.1 Breakdown of the balance
The breakdown of the balance of these headings in the accompanying consolidated balance sheets is as follows:
Financial Assets and Liabilities Held-for-Trading
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10.2 Debt securities
The breakdown by type of instrument of the balance under this heading in the accompanying consolidated balance sheets is as follows:
Debt Securities Held-for-Trading
Breakdown by type of instrument
Issued by Central Banks
Spanish government bonds
Foreign government bonds
Issued by Spanish financial institutions
Issued by foreign financial institutions
10.3 Equity instruments
The breakdown of the balance under this heading in the accompanying consolidated balance sheets is as follows:
Equity Instruments Held-for-Trading
Breakdown by Issuer
Shares of spanish companies
Shares of foreign companies
10.4 Trading derivatives
The trading derivatives portfolio arises from the Group’s need to manage the risks incurred by it in the course of normal business activity. As of December 31, 2011, 2010 and 2009, trading derivatives were principally contracted in over-the-counter (OTC) markets, with credit entities not resident in Spain as the main counterparties, and related to foreign-exchange, interest-rate and equity risk.
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Below is a breakdown by transaction type of the fair value of outstanding financial trading derivatives recognized in the accompanying consolidated balance sheets, divided into organized and OTC markets:
Outstanding Financial TradingDerivatives 2011
Organized markets
Financial futures
Options
Other products
OTC markets
Forward transactions
Future rate agreements (FRAs)
Swaps
Other financial institutions
Asset Trading Derivatives
Liability Trading Derivatives
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Outstanding Financial TradingDerivatives 2010
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Outstanding Financial TradingDerivatives 2009
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Other Financial Assets Designated at Fair Value through
Profit or Loss. Breakdown by Type of Instruments
Unit-linked products
Other securities
12.1 Breakdown of the balance
The breakdown of the balance by the main financial instruments in the accompanying consolidated balance sheets is as follows:
Available-for-Sale Financial Assets
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12.2 Debt securities
The breakdown of the balance under the heading “Debt securities”, broken down by the nature of the financial instruments, is as follows:
Debt Securities Available-for-Sale 2011
Domestic Debt Securities
Issue by Central Banks
Issue by credit institutions
Issue by other issuers
Foreign Debt Securities
Government securities
US Treasury and other US Government agencies
Other foreign governments and other government agency debt securities
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A significant part of the increase in “Other countries” is due primarily to the incorporation of the Garanti group into the consolidated BBVA Group.
Debt Securities Available-for-Sale 2010
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The decrease in the balance under the heading “Debt securities” in 2010 is mainly due to the sale of securities and changes in the valuations of these portfolios.
Debt Securities Available-for-Sale 2009
As of December 31, 2011, the credit ratings of the issuers of debt securities in the available-for-sale portfolio are as follows:
Available for Sale financial assets
Debt Securities by Rating
Without rating
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12.3 Equity instruments
The breakdown of the balance under the heading “Equity instruments” as of December 31, 2011, 2010 and 2009 is as follows:
Equity Instruments Available-for-Sale 2011
Equity instruments listed
Listed Spanish company shares
Other entities
Listed foreign company shares
Unlisted equity instruments
Unlisted Spanish company shares
Unlisted foreign companies shares
Equity Instruments Available-for-Sale 2010
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Equity Instruments Available-for-Sale 2009
12.4 Gains/losses
The changes in the gains/losses, net of taxes, recognized under the equity heading “Valuation adjustments – Available-for-sale financial assets” in the accompanying consolidated balance sheets are as follows:
Changes in Valuation Adjustments – Available-for-Sale
Financial Assets
Valuation gains and losses
Amounts transferred to income
The losses recognized under the heading “Valuation adjustments – Available-for-sale financial assets” in the consolidated income statement for 2011 correspond mainly to Spanish government debt securities.
Of the losses recognized under the heading “Valuation adjustments – Available-for-sale financial assets” and originating in debt securities, some 38.9% were generated over more than twelve months. However, no impairment has been estimated, as following an analysis of these unrealized losses it can be concluded that they were temporary, because: the interest payment dates of all the fixed-income securities have been satisfied; and because there is no evidence that the issuer will not continue to comply with his payment obligations, nor that future payments of both principal and interests will not be sufficient to recover the cost of the debt securities.
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The losses recognized under the heading “Impairment losses on financial assets (net) – Available-for-sale financial assets” in the accompanying consolidated income statement amounted to €25, €155 and €277 million for the years 2011, 2010 and 2009, respectively (see Note 49).
The breakdown of the balance under this heading in the accompanying consolidated balance sheets, according to the nature of the financial instrument, is as follows:
Loans and Receivables
13.1 Loans and advances to credit institutions
Reciprocal accounts
Deposits with agreed maturity
Demand deposits
Other accounts
Total gross
Accrued interests and fees
Hedging derivatives and others
Total net
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13.2 Loans and advances to customers
Mortage secured loans
Other secured loans
Other loans (*)
Credit accounts
Commercial credit
Receivable on demand and other
Finance leases
Financial paper
Impaired assets
Includes principally our customers’ commercial and consumer loans
As of December 31, 2011, 31% of “Loans and advances to customers” with a maturity greater than one year were concluded with fixed-interest rates and 69% with variable interest.
“Loans and advances to customers” includes finance lease arrangements provided by various entities in the Group for their customers to finance the purchase of assets, including movable and immovable property. The breakdown of the finance leases as of December 31, 2011, 2010 and 2009 is as follows:
Financial Lease Arrangements
Movable property
Real Estate
Floating rate
The heading “Loans and receivables – Loans and advances to customers” in the accompanying consolidated balance sheets also includes certain mortgage loans that, as mentioned in Note 35 and pursuant to the Mortgage Market Act, are considered a suitable guarantee for the issue of long-term mortgage covered bonds. This heading also includes some loans that have been securitized and not derecognized from the consolidated balance sheets (see Note 2.2.2).
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The amounts recognized in the accompanying consolidated balance sheets corresponding to these securitized loans are as follows:
Securitized Loans
Securitized mortgage assets
Other securitized assets
Commercial and industrial loans
Liabilities associated to assets retained on the balance sheet (*)
These liabilities are recognized under “Financial liabilities at amortized cost – Debt securities” in the accompanying consolidated balance sheets (Note 3.2 and 23).
Other securitized loans were derecognized from the accompanying consolidated balance sheets, as the Group did not retain any attendant risks or benefits, as specified below:
Derecognized Securitized Loans
13.3 Debt securities
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Held-to-Maturity Investments 2011
Other domestic debt securities
Government and other government agency debt securities
Held-to-Maturity Investments 2010
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Held-to-Maturity Investments 2009
The foreign securities held by the Group as of December 31, 2011, 2010 and 2009 as held-to-maturity investments portfolio correspond basically to European issuers.
After analyzing the unrealized losses, it was decided that, with the exception of those recognized for Greece’s sovereign debt, the rest were temporary, as the interest payment dates of all the securities have been satisfied; and because there is no evidence that the issuer will not continue to comply with the payment obligations, nor that future payments of both principal and interests will not be sufficient to recover the cost of the debt securities.
The following is a summary of the gross changes in 2011, 2010 and 2009 under this heading in the accompanying consolidated balance sheets:
Held-to-Maturity InvestmentsChanges on the Period
Acquisitions
Redemptions and others
Impairment
In the third quarter of 2011, some debt securities amounting to€1,817 million were reclassified from “Available-for-sale financial assets” to “Held-to-maturity investments”, as the intention of the Group had changed with respect to some of the sovereign debt securities due to the current market situation (see Note 7.1.5.).
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Information about the fair value and carrying amounts of these reclassified financial assets is given here:
Debt Securities reclassified to “Held toMaturity Investments”
Italy sovereign debt
Greece sovereign debt
Portugal sovereign debt
The changes in fair value recognized in “Total Equity – Valuation adjustments”, for the reclassified financial assets are as follows:
Change in Fair Value Recognised
The following table presents the amount recognized in the 2011 income statement from the valuation at amortized cost of the reclassified financial assets, as well as the impact recognized on the income statement and under the heading “Total Equity – Valuation adjustments”, as of December 31, 2011, if the reclassification was not performed.
Effect on Income Statement and OtherComprehensive Income
Greece sovereign debt (*)
Includes the impact on income statement for the impairment recognized after the reclassification
With respect to these reclassified values, the undiscounted future cash flows that, at the date of reclassification, were expected to be recovered, are indicated below:
Debt Securities reclassified to “Held to Maturity Investments”
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The balance of these headings in the accompanying consolidated balance sheets is as follows:
Hedging derivatives and Fair value changes of the hedged items in portfolio hedges ofinterest rate risk
Fair value changes of the hedged items in portfolio hedges of interest rate risk
As of December 31, 2011, 2010 and 2009, the main positions hedged by the Group and the derivatives assigned to hedge those positions were:
Fair value hedge:
Available-for-sale fixed-interest debt securities: This risk is hedged using interest-rate derivatives (fixed-variable swaps).
Long-term fixed-interest debt securities issued by the Group: This risk is hedged using interest-rate derivatives (fixed-variable swaps).
Available-for-sale equity instruments: This risk is hedged using equity swaps.
Fixed-interest loans: This risk is hedged using interest-rate derivatives (fixed-variable swaps).
Fixed-interest deposit portfolio hedges: This risk is hedged using fixed-variable swaps and interest-rate options. The valuation of the deposit hedges corresponding to interest-rate risk is recognized under the heading “Changes in the fair value of the hedged items in the portfolio hedges of interest-rate risk.”
Cash-flow hedges: Most of the hedged items are floating interest-rate loans. This risk is hedged using foreign-exchange and interest-rate swaps.
Net foreign-currency investment hedges: The risks hedged are foreign-currency investments in the Group’s subsidiaries based abroad. This risk is hedged mainly with foreign-exchange options and forward currency purchases.
Note 7 analyzes the Group’s main risks that are hedged using these financial instruments.
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The details by hedged risk of the fair value of the hedging derivatives recognized in the accompanying consolidated balance sheets are as follows:
Hedging Derivatives by Markets and TransactionType 2011
Fair value hedge
Of which: Macro hedge
Cash flow hedge
Net investment in a foreign operation hedge
Other financial Institutions
Asset Hedging Derivatives
Liability Hedging Derivatives
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Hedging Derivatives by Markets and Transaction Type2010
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Hedging Derivatives by Markets and Transaction Type2009
The cash flows forecasts for the coming years for cash flow hedging recognized on the accompanying consolidated balance sheet as of December 31, 2011 are:
Cash Flows of Hedging Instruments
Receivable cash inflows
Payable cash outflows
The cash flows indicated above will impact the consolidated income statements until 2055. The amounts previously recognized in equity from cash flow hedge that were removed from equity and included in consolidated income statement in the heading “Gains or losses of financial assets and liabilities (net)” or in the heading “Exchange differences (net)” during the years 2011, 2010 and 2009 reached €32 million, €34 million and €11 million, respectively.
The amount for derivatives designated as accounting hedges that did not pass the effectiveness test in 2011, 2010 and 2009 was not significant.
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The composition of the balance under the heading “Non-current assets held for sale” in the accompanying consolidated balance sheets, broken down by the origin of the assets, is as follows:
Non-Current Assets Held-for-Sale Breakdown by type of Asset
From:
Operating leases
Foreclosures and recoveries
Foreclosures
Recoveries from financial leases
Accrued amortization (*)
Until classified as non-current assets held for sale
As of December 31, 2011, 2010 and 2009, there were no liabilities associated with non-current assets held for sale.
The changes in the balances under this heading in 2011, 2010 and 2009 are as follows:
Cost –
Additions
Contributions from merger transactions
Retirements
Transfers
Impairment –
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16.1 From tangible assets for own use
The most significant changes in the balance under the heading “Non-current assets held for sale – From tangible assets for own use”, in 2011, 2010 and 2009, were a result of the following operations:
In 2009, 1,150 properties (offices and other singular buildings) belonging to the Group in Spain were reclassified to this heading at a carrying amount of €426 million; as of December 31, 2008, they were recorded under the heading “Tangible assets – Property, plants and equipment – For own use” of the consolidated balance sheets (see Note 19). A sales plan has been established for these properties.
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In 2011, 2010 and 2009, the Bank sold 4, 164 and 971, properties in Spain, to investors not related to the BBVA Group for a total price of €79, €404 and €1,263 million, respectively; at market prices and without making funds available to the buyers to pay the price of these transactions.
At the same time, the Bank signed long-term operating leases with the buyers of the properties, 10, 15, 20, 25 and 30 years, which were renewable under certain conditions. The amount of the annual initial income from the properties under these operating leases reached€122 million, though this income is updated annually based on the conditions established in said contracts.
In 2011, 2010 and 2009, the amounts registered under this item in the accompanying consolidated income statements under this heading were €138, €113 and €31 million, respectively (see Note 46.2).
In the sales agreements for said properties, purchase options on behalf of the Bank were included upon the termination of the respective operating lease contracts; the exercise price of the option will be determined by an independent expert on a case-by-case basis. As a result, the Bank considered these sales as firm sales and registered the profits for this item under market conditions of€67, €273 and €914 million, under the headings “Gains (losses) in non-current assets held for sale not classified as discontinued operations” in the accompanying consolidated income statements for 2011, 2010 and 2009 (see Note 52).
The current value of the future minimum payments the Bank will incur in the effective period of the operating lease contracts, as of December 31, 2011, is€112 million in 1 year,€364 million between 2 and 5 years and €652 million in more than 5 years.
16.2 From foreclosures or recoveries
As of December 31, 2011, 2010 and 2009, the balance under the heading “Non-current assets held for sale – Foreclosures or recoveries” was made up of €1,703, €1,105 and €441 million of assets for residential use, €290, €214 and €209 million of assets for tertiary use (industrial, commercial or offices) and€14, €10 and €27 million of assets for agricultural use, respectively.
As of December 31, 2011, 2010 and 2009, mean maturity of the assets through foreclosures or recoveries was less than 2 years.
In 2011, 2010 and 2009, some of the sales operations of these assets were financed by Group entities. The amount of the loans granted to the buyers of these assets over 2011, 2010 and 2009 was €163, €193 and €40 million, respectively, with a mean percentage financed of 93%, 90% and 90%, respectively, of the price of sale.
As of December 31, 2011, 2010 and 2009, the amount of gains from the sale of assets financed by Group entities (and, therefore, are not recognized consolidated income statements), reached €30, €32 and €32 million, respectively.
The breakdown of the balances of “Investments in entities accounted for using the equity method” in the accompanying consolidated balance sheets is as follows:
Investments in Entities Accounted for Using the Equity Method
Associate entities
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17.1 Associates
The following table shows the carrying amount of the most significant of the Group’s investments in associates:
Grupo CITIC (*)
Tubos Reunidos, S.A. (**)
BBVA Elcano Empresarial II, S.C.R.R.S., S.A.
BBVA Elcano Empresarial, S.C.R.R.S., S.A.
Occidental Hoteles Management, S.L. (***)
Rest of associate
The goodwil amounted to €1,696 million as of December 31 2011
Company that quoted in Madrid’s stock exchange market.
Since November 2010 the company had been accounted from associated to jointly controlled entities.
Appendix IV shows the details of the associates as of December 31, 2011.
Associates Entities. Changes in the Year Breakdown of Goodwill
Acquisitions and capital increases (*)
Disposals
Transfers and others (**)
CITIC Group
The change of 2011 correspond basically to the capital increase on CNCB at which the Group attended to maintain their percentage of participation, with a payment of €425 million. The change of 2010 correspond basically to the acquisition of 4.93% of CNCB formalized in April 2010.
The changes of 2011 and 2010 correspond principally to the good and recurrent results in CNCB together with the positive evolution of the exchange rates. The change of 2009 correspond to the reclassification from the heading “Available-for-sale financial assets” of CNCB.
Agreement with the CITIC Group –
The BBVA Group’s investment in the CITIC Group includes the investment in Citic International Financial Holdings Limited (“CIFH”) and China National Citic Bank (“CNCB”). As of December 31, 2011, BBVA had a 29.68% holding in CIFH and 15% in CNCB.
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As of December 31, 2011, the BBVA Group maintained several agreements with the CITIC Group that were strategic for both: for BBVA, as financial activity could be developed in continental China through this alliance and, for CNCB, as it allows CITIC to develop its international business. The BBVA Group has the status of “sole strategic investor” in CNCB.
17.2 Investments in jointly-controlled entities
Jointly Controlled Entities
Corporación IBV Participaciones Empresariales S.A.
Occidental Hoteles Management, S.L.
Fideicomiso F/403853-5 BBVA Bancomer SºS ZIBAT
I+D Mexico, S.A.
Fideicomiso Hares BBVA Bancomer F/47997-2 (*)
Fideicomiso F/70413 Mirasierra
Fideicomiso F/402770-2 Alamar
Fideicomiso F/403112-6 Dos lagos
Altitude Software SGPS, S.A.
Las Pedrazas Golf, S.L.
Of which
Since august 2010 the company had been accounted from jointly controlled entities to fully consolidated subsidiary.
If the jointly-controlled entities accounted for using equity method had been accounted for by the proportionate method, the effect on the Group’s main consolidated figures as of December 31, 2011, 2010 and 2009 would have been as follows:
Jointly Controlled Entities. Effect on the Group’s main figures
Details of the jointly-controlled entities consolidated using the equity method as of December 31, 2011 are shown in Appendix IV.
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17.3 Associates and jointly-controlled entities accounted for by the equity method
The following table provides relevant information of the balance sheet and income statement of associates and jointly-controlled entities accounted for using the equity method as of December 31, 2011, 2010 and 2009, respectively (see Appendix IV).
Associates and Jointly ControllesEntities
Financial Main figures
Current Assets
Non-current Assets
Current Liabilities
Non-current Liabilities
Net sales
Operating Income
Net Income
Dates of the company’s financial statements updated at the most recent available information.
Information applying the corresponding ownership and without the corresponding standardization and consolidation adjustments.
17.4 Notifications about acquisition of holdings
Appendix V provides notifications on acquisitions and disposals of holdings in associates or jointly-controlled entities, in compliance with Article 155 of the Corporations Act and Article 53 of the Securities Market Act 24/1988.
17.5 Impairment
No impairment losses on the goodwill of jointly-controlled entities and associated were recognized in 2011 or 2010.
In 2009, €3 million in impairment losses on the goodwill of jointly-controlled entities were recognized, of which most are related to Econta Gestión Integral, S.L.
This heading in the accompanying consolidated balance sheets reflects the amounts receivable by consolidated entities from reinsurance contracts with third parties.
Reinsurance Asset
Reinsurance assets
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The breakdown of the balance and changes of this heading in the accompanying consolidated balance sheets, according to the nature of the related items, is as follows:
Tangible Assets. Breakdown byType of Assets and Changes in theyear 2011
Acquisition of subsidiaries in the year
Disposal of entities in the year
Exchange difference and other
Accrued depreciation –
Additions (Note 47)
Net tangible assets –
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Tangible Assets. Breakdown byType of Assets and Changes in theyear 2010
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Tangible Assets. Breakdown byType of Assets and Changes inthe year 2009
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The reduction in the balance under the heading “Tangible assets – For own use – Land and buildings” in 2009 is mainly the result of the transfer of some properties owned by the Bank in Spain to the heading “Non-current assets held for sale”, as mentioned in Note 16.
As of December 31, 2011, 2010 and 2009, the totally amortized intangible assets still in use amounted to €1,572, €480 and €1,583 million, respectively.
The main activity of the Group is carried out through a network of bank branches located geographically as shown in the following table:
Bank Branches by Geographical Location
Rest of the world (*)
Garanti branches are not included
The following table shows the detail of the net carrying amount of the tangible assets corresponding to Spanish or foreign entities as of December 31, 2011, 2010 and 2009:
Tangible Assets by Spanish and Foreign Subsidiaries Net AssetsValues
Foreign subsidiaries
BBVA and Spanish subsidiaries
The amount of tangible assets under financial lease schemes on which it is expected to exercise the purchase option was insignificant as of December 31, 2011, 2010 and 2009.
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20.1 Goodwill
The breakdown of the balance under this heading in the accompanying consolidated balance sheets, according to the cash-generating units (“CGU”) that originated them, is as follows:
‘Goodwill. Breakdown by CGU andChanges of the year 2011
‘Goodwill. Breakdown by CGU andChanges of the year 2010
‘Goodwill. Breakdown by CGU andChanges of the year 2009
United States –
The most significant goodwill of the Group corresponds to the CGU of the United States (including Puerto Rico) and is equal to its value in use. This is calculated as the discounted value of the cash flow projections that the Group’s Management estimates based on the latest budgets available for the next five years.
As of December 31, 2011, the Group used a sustainable growth rate of 4.0%, (4.2% and 4.3% as of December 31, 2010 and 2009, respectively) to extrapolate the cash flows in perpetuity which was based on the US real GDP growth rate. The rate used to discount the cash flows is the cost of capital assigned to the CGU, and stood at 11.4% as of December 31, 2011 (11.4% and 11.2% as of December 31, 2010 and 2009, respectively), which consists of the free risk rate plus a risk premium.
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Turkey –
As stated in Note 3, in 2011 the Group acquired 25.01% of the share capital of the Turkish bank Garanti. This acquisition has involved the provisional recognition at the time of the purchase of €1,384 million in goodwill on the acquisition date. The calculation of this goodwill is subject to change, since the fair values are being calculated according to the purchase method set out in IFRS-3, and they may be modified during a period of up to one year from the acquisition date (March 2011).
The detail of the carrying amount of the consolidated assets and liabilities of the Garanti Group previous to its acquisition and the corresponding fair values, gross of tax, which according to the acquisition method have been estimated provisionally at the moment of purchase, is as follows:
Valuation and calculation of goodwill for the acquisition of 25.01% stake in Garanti
Acquisition cost (A)(*)
Value of the 25.01% of Garanti at the moment of the acquisition
Financial assets
Intangibles assets obtained from previous business combinations
Intangible assets identify at the date of the business combination (**)
Financial liabilities
Other liabilities
Non-recognised contingent liabilities
Deferred tax
Total fair value of assets and liabilities acquired (b)
Goodwill (A) – (B)
Cost of acquisition is the price paid net of the amount of hedges, dividends declared and the value of the control premium that is included in the purchase agreement (see Note 3).
The amount of intangible assets identified at the time of purchase, mainly corresponds to the goodwill allocated to the mark and the “core deposits.”
The valuations are being reviewed by independent experts (other than the Group’s accounts auditor), applying different valuation methods on the basis of each asset and liability. The valuation methods used are: based on the present value of the cash flows that business or asset is expected to generate in the future, the Market Transaction Method and the Cost Method.
Impairment tests –
As described in Note 2.2.8, the cash-generating units to which goodwill has been allocated are periodically tested for impairment by including the allocated goodwill in their carrying amount. This analysis is performed at least annually and always if there is any indication of impairment. These estimates have been verified by independent experts, not by the Group’s accounts auditor.
The Group performed the necessary goodwill impairment tests with the following results:
As of December 31, 2011: Impairment losses of€1,444 million have been estimated in the United States cash-generating unit which have been recognized under “Impairment losses on other
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assets (net) – Goodwill and other intangible assets” in the accompanying consolidated income statement for 2011 (see Note 50). This loss has been attributed to a lower forecast of the benefits expected from this CGU in relation to those anticipated initially due to the fact that:
the economic recovery is slower than expected and demand for loans is lower than forecasted; this, together with the low interest rate prediction all imply a slowdown in net interest income growth below the initial expectations; and
growing regulatory pressure, with the implementation of new regulations, will imply lower-than-expected fee income, basically for cards, while operating costs will rise with respect to the expectations.
Both the US CGU’s fair values and the fair values assigned to its assets and liabilities are based on the estimates and assumptions that the Group’s Management has deemed most likely given the circumstances. However, some changes to the valuation assumptions used could result in differences in the impairment test result.
If the discount rate had increased or decreased by 50 basis points, the difference between the carrying amount and its recoverable amount would have increased or decreased by up to €585 million and €671 million, respectively. If the growth rate had increased or decreased by 50 basis points, the difference between the carrying amount and its recoverable amount would have increased or decreased by €517 million and €452 million, respectively.
As of December 31, 2010: There were no indications of impairment in the goodwill recognized by the Group as of that date, except for the insignificant impairment estimated on the goodwill of investments in Rentrucks, Alquiler y Servicios de Transportes, S.A. and in BBVA Finanzia SpA (for€9 and €4 million, respectively).
As of December 31, 2009: Impairment losses of€1,097 million have been estimated in the United States cash-generating unit which have been recognized under “Impairment losses on other assets (net) – Goodwill and other intangible assets” in the accompanying consolidated income statement for 2009 (see Note 50). This loss was attributed to the significant decline in economic and credit conditions in the states in which the Group operates in the United States.
20.2 Other intangible assets
Other Intangible Assets
Computer software acquisition expenses
Other deferred charges
Other Intangible Assets. Changes Over the Period
Amortization in the year
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The increase of the additions to the table above in 2011 with respect to previous years is due, primarily, to the intangible assets recognized for the Garanti purchase transaction.
As of December 31, 2011, 2010 and 2009, the totally amortized intangible assets still in use amounted to €224, €294 and €1,061 million, respectively.
21.1 Consolidated tax group
Pursuant to current legislation, the BBVA Consolidated Tax Group includes the Bank as the Parent company, and, as subsidiaries, the Spanish subsidiaries that meet the requirements provided for under Spanish legislation regulating the taxation regime for the consolidated net income of corporate groups.
The Group’s other banks and subsidiaries file tax returns in accordance with the tax legislation in force in each country.
21.2 Years open for review by the tax authorities
The years open to review in the BBVA Consolidated Tax Group as of December 31, 2011 are 2007 and following for the main taxes applicable.
The rest of the Spanish consolidated entities in general have the last four years open for inspection by the tax authorities for the main taxes applicable, except for those in which there has been an interruption of the limitation period due to the start of an inspection.
In 2011, as a result of action by the tax authorities, tax inspections proceedings were instituted for the years since (and including) 2006, some of which were contested. After considering the temporary nature of certain of the items assessed in the proceedings, provisions were set aside for the liabilities, if any, that might arise from these assessments according to our best estimates.
In view of the varying interpretations that can be made of the applicable tax legislation, the outcome of the tax inspections of the open years that could be conducted by the tax authorities in the future could give rise to contingent tax liabilities which cannot be objectively quantified at the present time. However, the Banks’ Board of Directors and its tax advisers consider that the possibility of these contingent liabilities becoming actual liabilities is remote and, in any case, the tax charge which might arise therefore would not materially affect the Group’s accompanying consolidated financial statements for 2011.
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21.3 Reconciliation
The reconciliation of the Group’s corporate tax expense resulting from the application of the standard tax rate and the expense registered by this tax in the accompanying consolidated income statements is as follows:
Reconciliation of the Corporate Tax Expense Resulting from the Application of the StandardRate and the Expense Registered by this Tax
Corporation tax (30%)
Decreases due to permanent differences:
Tax credits and tax relief at consolidated Companies
Other items (net)
Net increases (decreases) due to temporary differences
Charge for income tax and other taxes
Deferred tax assets and liabilities recorded (utilized)
Income tax and other taxes accrued in the period
Adjustments to prior years’ income tax and other taxes
Income tax and other taxes
The effective tax rate for the Group in 2011, 2010 and 2009 is as follows:
Effective Tax Rate
Income from:
Consolidated Tax Group
Other Spanish Entities
Foreign Entities
In 2011, it presented an effective tax rate that was lower than in previous years due, primarily, to the greater contribution in comparable terms of the income with low or zero tax rate (especially dividends and earnings from entities by the equity method) and of the earnings of foreign entities (especially in the Americas and Garanti) where tax rates are low.
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21.4 Tax recognized in equity
In addition to the income tax recognized in the accompanying consolidated income statements, the Group has recognized the following tax charges for these items in the consolidated equity:
Tax Recognized in Total Equity
Charges to total equity
Credits to total equity (*)
Debt securities and others
Tax asset credit to total equity as of December 31, 2010, due primarily to debt instruments unrealized losses.
21.5 Deferred taxes
The balance under the heading “Tax assets” in the accompanying consolidated balance sheets includes the tax receivables relating to deferred tax assets; the balance under the heading “Tax liabilities” includes the liabilities relating to the Group’s various deferred tax liabilities.
The details of the most important tax assets and liabilities are as follows:
Tax Assets and Liabilities
Tax assets –
Pensions
Portfolio
Tax losses
Tax Liabilities –
As of December 31, 2011, 2010 and 2009, the estimated balance of temporary differences in connection with investments in subsidiaries, branches and associates and investments in jointly controlled entities was €527, €503 and €432 million, respectively.
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Other Assets and Liabilities
Real estate companies
Transactions in transit
Accrued interest
Unaccrued prepaid expenses
Other prepayments and accrued income
Other items
Unpaid accrued expenses
Other accrued expenses and deferred income
The heading “Inventories” includes the net carrying amount of the purchases of land and property that the Group’s real estate companies hold for sale or for their business. The amounts reflected under this heading include real estate assets purchased by those companies from distressed customers (mainly in Spain). As of December 31, 2011, the carrying amount of these properties amounted approximately €3.2 billion net of an accumulated valuation adjustment due to impairment losses amounted to €1.8 billion.
The principal companies in the Group that engage in real estate business activity and make up nearly the entire amount in the “Inventories” heading of the accompanying consolidated balance sheets are as follows: Anida Operaciones Singulares, S.L.; Anida Desarrollos Inmobiliarios, S.A. and Desarrollo Urbanístico Chamartín, S.A.
Financial Liabilities at Amortized Cost
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23.1 Deposits from credit institutions
The breakdown of the balance under this heading in the consolidated balance sheets, according to the nature of the financial instruments, is as follows:
Deposits from Credit Institutions
The breakdown by geographical area and the nature of the related instruments of this heading in the accompanying consolidated balance sheets, disregarding interest accrued pending maturity, is as follows:
Deposits from Credit Institutions 2011
Deposits from Credit Institutions 2010
Deposits from Credit Institutions 2009
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23.2 Customer deposits
The breakdown of this heading of the accompanying consolidated balance sheets, by type of financial instruments, is as follows:
Customer Deposits
Government and other government agencies
Spanish
Other resident sectors
Savings accounts
Fixed-term deposits
Non-resident sectors
In foreign currency
Deposits from other creditors without valuation adjustment
The breakdown by geographical area of this heading in the accompanying consolidated balance sheets, by type of instrument and geographical area, disregarding valuation adjustments, is as follows:
Customer Deposits 2011
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Customer Deposits 2010
Customer Deposits 2009
23.3 Debt certificates (including bonds)
Debt Certificates
Promissory notes and bills
Bonds and debentures
The breakdown of the most significant outstanding issuances, repurchases or refunds of debt instruments issued by the consolidated companies as of December 31, 2011, 2010 and 2009 is shown on Appendix VIII.
The changes in the balances under this heading, together with the Subordinated Liabilities for 2011, 2010 and 2009 are included in Note 58.4.
23.3.1 Promissory notes and bills
The breakdown of the balance under this heading, by currency, is as follows:
These promissory notes were issued mainly by BBVA, S.A. and BBVA Banco de Financiación, S.A.
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23.3.2 Bonds and debentures issued
The breakdown of the balance under this heading, by financial instrument and currency, is as follows:
Bonds and debentures issued
In Euros –
Non-convertible bonds and debentures at floating interest rates
Non-convertible bonds and debentures at fixed interest rates
Covered bonds
Hybrid financial instruments
Securitization bonds realized by the Group
Other securities (**)
Accrued interest and others (*)
In Foreign Currency –
Hedging operations and issuance costs.
Mainly territorial covered bonds
The following table shows the weighted average interest rates of fixed and floating rate bonds and debentures issued in euros and foreign currencies in effect as of December 31, 2011, 2010 and 2009:
Interests Rates of Promissory Notes and Bills Issued
Most of the foreign-currency issuances are denominated in U.S. dollars.
23.4 Subordinated liabilities
Subordinated Liabilities
Subordinated debt
Preferred securities
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Of the above, the issuances of BBVA International, Ltd., BBVA Capital Finance, S.A.U. and BBVA International Preferred, S.A.U, BBVA Subordinated Capital, S.A.U. and BBVA Global Finance, Ltd, are subordinately guaranteed by the Bank.
These issuances are non-convertible subordinated debt and, accordingly, for debt seniority purposes, they rank behind ordinary debt. The breakdown of this heading in the accompanying consolidated balance sheets, disregarding valuation adjustments, by currency of issuance and interest rate, is disclosed in Appendix VIII. The variations of the balance in 2011 are mainly the result of the following transactions:
Conversion of subordinated bond issues
As of December 31, 2010 and 2009, subordinated debt included an issue of convertible subordinated obligations into Bank shares amounting to €2,000 million, carried out by BBVA in September 2009 (hereinafter, “Convertible bonds”). These obligations have a 5% annual coupon, payable quarterly, and can be converted into Bank shares after the first year, at the Bank’s discretion, at each of the coupon payment dates, and by obligation on the date of their final maturity date (October 15, 2014). These obligations were recognized as financial liabilities since the number of Bank shares to be delivered can vary.
The Board of Directors of BBVA, at its meeting on June 22, 2011, agreed to the mandatory conversion of all convertible bonds. The conversion took place on July 15, 2011, an interest payment date, according to the procedure established to that effect under the terms and conditions of the issue. As a result, an increase of the Bank’s common stock was carried out (approved by the Board of Directors at its meeting on July 27, 2009, in using the power delegated by the Annual General Meeting held on March 14, 2008 in Point Six of the Agenda) through the issue of ordinary BBVA shares needed to address the conversion of the Convertible Bonds (see Note 27).
Mandatory convertible subordinated bond issue
The BBVA Board of Directors, at its meeting on November 22, 2011, agreed, in virtue of the authorization conferred by the AGM of March 14, 2008, to proceed to the issue of mandatory convertible subordinated obligations into new ordinary BBVA shares (hereinafter, the “Issue” or “Mandatory Convertible Subordinated Obligations” or “Bonds”) for a maximum amount of€3,475 million.
This issue excluded the right to preemptive subscription since it was exclusively designed for holders of preferred securities held by BBVA Capital Finance, S.A. Unipersonal (series A, B, C and D) and BBVA International Limited (series F), all secured by BBVA, S.A., who accept the purchase offer for those preferred securities on behalf of BBVA.
Thus, those who accepted the purchase offer would subscribe a nominal amount of “Mandatory Convertible Subordinated Obligations” equivalent to 100% of the nominal amount or cash for the preferred securities they owned and that would be acquired by BBVA.
As of December 30, 2011, the purchase offer for preferred securities and the subscription of “Bonds” amounted to €3,430 million, which represented 98.71% of the total preferred securities to be repurchased. The “Issue” was carried out at 100% of the nominal value of the “Convertible Bonds”, which was €100. Thus, the Bank issued 34,300,002 “Bonds” for a total amount of €3,430 million. These “Bonds” were recognized as financial liabilities since the number of Bank shares to be delivered can vary. The remuneration of the “Bonds” was 6.5% annual over nominal, payable on a quarterly basis.
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Without prejudice to the issuer’s authority to convert the “Bonds” at any date of remuneration, on June 30, 2012, it is expected that 50% of the nominal value of the “Bonds” in circulation at said date shall be mandatorily converted into new ordinary BBVA, S.A. shares, and that the total conversion of the “Issue” take place on June 30, 2013. The conversion will be in terms of the market price of the BBVA share, according to the terms and conditions established in the “Issue” brochure.
The breakdown by issuer of the balance under this heading in the accompanying consolidated balance sheets is as follows:
Preferred Securities by Issuer
BBVA International, Ltd. (1) (2)
BBVA Capital Finance, S.A.U. (1) (2)
Banco Provincial, S.A
BBVA International Preferred, S.A.U. (3)
Phoenix Loan Holdings, Inc.
Traded on the Spanish AIAF market,
The increase is due to the purchase offer and redemption of the preferred shares mentioned above
Traded on the London Stock Exchange and New York Stock Exchange
These issues were fully subscribed by third parties outside the Group and are wholly or partially redeemable at the issuer company’s option after five or ten years from the issue date, depending on the terms of each issue.
The variation in the balance under this heading in 2011 is due primarily to the purchase transaction and early amortization of preferred securities of €3,430 million indicated in the section above.
The breakdown of the issues of preferred securities in the accompanying consolidated balance sheets, disregarding valuation adjustments, by currency of issuance and interest rate of the issues, is disclosed in Appendix VIII.
23.5 Other financial liabilities
Creditors for other financial liabilities
Collection accounts
Creditors for other payment obligations
Dividend payable but pending payment (Note 4)
As of December 31, 2011 and 2010, the “Dividend payable but pending payment” corresponds to the third interim dividend against the 2011 and 2010 results, paid in January of the following years, (see Note 4). As of December 31, 2009, this heading did not include the third interim dividend, as it was paid in December 2009.
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Liabilities under Insurance Contracts Technical Reserve andProvisions
Mathematical reserves
Provision for unpaid claims reported
Provisions for unexpired risks and other provisions
The breakdown of the balance under this heading in the accompanying consolidated balance sheets, based on type of provisions, is as follows:
Provisions. Breakdown by concepts
Provisions or contingencies that individually are not significant.
The changes in the heading “Provisions for contingent risks and commitments” in the accompanying consolidated balance sheets are presented in Note 7.1.8, together with the changes of impairment losses.
The changes in 2011, 2010 and 2009 in the balances under this heading in the accompanying consolidated balance sheets are as follows:
Provisions for Pensions and Similar Obligations. Changes Over the Period
Add –
Charges to income for the year
Interest expenses and similar charges
Provision expenses
Charges to equity (*)
Transfers and other changes
Payments
Amount used and other changes
Correspond to actuarial losses (gains) arising from certain defined-benefit post-employment pension commitments and welfare benefits recognized in “Equity” (See Note 2.2.12).
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Provisions for Taxes, Legal Contingents and Other Provisions. Changes Over the Period
Balance at beginning
Charge to income for the year
Acquisition of subsidiaries
Available funds
Amount used and other variations
Ongoing legal proceedings and litigation –
The Group is party to certain legal actions in a number of jurisdictions, including, among others, Spain, Mexico and the United States, arising in the ordinary course of business. BBVA considers that none of such actions is material, individually or in the aggregate, and none of such actions is expected to result in a material adverse effect on the Group’s financial position, results of operations or liquidity, either individually or in the aggregate. Management believes that adequate provisions have been made in respect of the actions arising in the ordinary course of business. BBVA has not disclosed to the markets any contingent liability that could arise from such actions as it does not consider them material.
As stated in Note 2.2.12, the Group has both defined-benefit and defined-contribution post-employment commitments with employees; the latter is gradually increasing mainly because it is the scheme applying to new hires and because pre-existing defined-benefit commitments have been mostly closed.
26.1 Defined-contribution commitments
The defined-contribution plans are settled through contributions made by the Group annually on behalf of its beneficiaries, who are, almost exclusively, active employees in the Group. These contributions are accrued and charged to the consolidated income statement in the corresponding financial year (see Note 2.2.12). No liability is therefore recognized in the accompanying consolidated balance sheets for this purpose.
The amounts registered under this item in the accompanying consolidated income statements for contributions to these plans in 2011, 2010 and 2009 were€80, €84 and €68 million, respectively (see Note 46.1).
26.2 Defined-benefit plans and other long-term commitments
Pension commitments in defined-benefit plans correspond mainly to employees who have retired or taken early retirement from the Group and to certain groups of employees still active in the Group in the case of pension benefits, and to the majority of active employees in the case of permanent disability and death benefits.
A breakdown of the Group’s total amounts for pension commitments in defined-benefit plans and other post-employment commitments (such as early retirement and welfare benefits) for the last five years can be found in the table below. The commitments are recognized under the heading “Provisions – Provisions for pensions and similar obligations” of the corresponding accompanying consolidated balance sheets (see Note 25).
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Commitments and Plan Assets in Defined-Benefit Plans and Other Post-Employment Commitments
Pension and post-employment benefits
Assets and insurance contracts coverage
Net assets
Net liabilities (*)
Registered under the heading “Provisions – Provisions for pensions and similar obligations” of the accompanying consolidated balance sheets
This information is presented below in greater detail, broken down by beneficiaries from Group companies in Spain and other beneficiaries, as of December 31, 2011, 2010 and 2009.
Pensions and Early-RetirementCommitments and Welfare Benefits:Spain and Abroad
Post-employment benefits
Early retirements
Post-employment welfare benefits
Total post-employment benefits (1)
Insurance contracts coverage
Other plan assets
Total plan assets and insurance contracts coverage (2)
Total net commitments (1) – (2)
of which:
The balance under the heading “Provisions – Provisions for pensions and similar obligations” of the accompanying consolidated balance sheets as of December 31, 2011 included €206 million, for commitments for post-employment benefits maintained with previous members of the Board of Directors and the Bank’s Management Committee. No charges for those concepts were recognized in the consolidated income statements in 2011.
In addition to the commitments to employees indicated above, the Group has other less relevant commitments. These include long-service awards, consisting in a cash payment of a certain amount or in the allotment of Banco Bilbao Vizcaya Argentaria, S.A. shares. These awards are granted to certain groups of employees when they complete a given number of years of effective service
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As of December 31, 2011, 2010 and 2009, the actuarial liabilities for the outstanding awards amounted to €36, €39 and €39 million, respectively. Of that sum, €11, €11 and €13 million corresponded to Spanish companies and €25, €28 and €26 million corresponded to companies and branches abroad, respectively. The commitments above are recognized under the heading “Other provisions” of the accompanying consolidated balance sheets (see Note 25).
The net charges registered in the accompanying consolidated income statements and under the heading “Equity” of the accompanying consolidated balance sheets (see Note 2.2.12) for the commitments in post-employment benefits in entities in Spain and abroad, are as follows:
Total Post-employments Benefits BBVA Group: Income Statements and Equity Effects.
Interest cost
Expected return on plan assets
Defined-contribution plan expense
Defined-benefit plan expense
Other personnel expenses – Welfare benefits
Provision – Pension funds and similar obligations
Total Effects in Income Statements: Debit (Credit)
Total Effects in equity: Debit (Credit) (*)
Correspond to actuarial losses (gains) arising from pension commitments and certain welfare benefits recognized in “Valuation Adjustments”. For Early retirements are recognized in the Income Statements (see Note 2.2.12.).
26.2.1 Commitments in Spain
The most significant actuarial assumptions used as of December 31, 2011, 2010 and 2009, to quantify these commitments with employees in Spain are as follows:
Actuarial Assumptions Commitments withemployees in Spain
Mortality tables
Discount rate (cumulative annual)
Consumer price index (cumulative annual)
Salary growth rate (cumulative annual)
Retirement age
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The breakdown of the various commitments to employees in Spain is as follows:
The breakdown of pension commitments in defined-benefit plans as of December 31, 2011, 2010 and 2009 is as follows:
Pension Commitments Spain
Pension commitments to retired employees
Vested contingencies in respect of current employees
Total (*)
Recognized under the heading “Provisions-Provisions for pension and similar obligations” in the accompanying consolidated balance sheets
To fund some pension commitments in Spain, insurance contracts have been written with insurance companies not related to the Group. These commitments are funded by plan assets and therefore are presented in the accompanying consolidated balance sheets for the net amount of the commitment less plan assets As of December 31, 2011, 2010 and 2009, the plan assets related to the aforementioned insurance contracts (for €379, €430 and €455 million, respectively) equaled the amount of the commitments covered; therefore, no amount for this item was included in the accompanying consolidated balance sheets.
The rest of commitments for pensions in Spain include defined-benefit commitments for which insurance has been contracted with BBVA Seguros, S.A. de Seguros y Reaseguros, which is 99.95% owned by the Group. As it is an entity consolidated within the BBVA Group, the assets in which the insurance company has invested the amount of the policies cannot be considered plan assets under IAS 19 and are presented in the accompanying consolidated balance sheets under different headings of “assets”, depending on the classification of their corresponding financial instruments. The commitments are recognized under the heading “Provisions – Provisions for pensions and similar obligations” of the accompanying consolidated balance sheets (see Note 25).
In 2011, the Spanish companies in the Group offered certain employees the possibility of taking early retirement before the age stipulated in the collective labor agreement in force. This offer was accepted by 669 employees (683 and 857 in 2010 and 2009, respectively).
The early retirements commitments in Spain as of December 31, 2011, 2010 and 2009 are recognized under the heading “Provisions – Provisions for pensions and similar obligations” (see Note 25) in the accompanying consolidated balance sheets and amounted to €2,904 million, €3,106 million and€3,309 million, respectively.
The cost of early retirements for the year was recognized under the heading “Provision Expense (Net) – Transfers to funds for pensions and similar obligations – Early retirements” in the accompanying consolidated income statements (see Note 48).
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The details of these commitments as of December 31, 2011, 2010 and 2009 are as follows:
Post-Employment Welfare Benefits Commitments in Spain
Post-employment welfare benefit commitments to retired employees
Vested post-employment welfare benefit contingencies in respect of current employees
Total Commitments (*)
Changes in commitments with employees
The changes in the net commitments with employees in Spain in 2011, 2010 and 2009 are as follows:
Net Commitments in Spain : Changes in the year 2011
Balance at the Beginning
Current service cost
Cost for early retirements
Past service cost or changes in the plan
Benefits paid in the period
Acquisitions and divestitures
Effect of curtailments and settlements
Contributions in the period
Actuarial gains and losses
Other changes
Balance at the End
Net Commitments in Spain : Changes in the year 2010
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Net Commitments in Spain : Changes in the year 2009
26.2.2 Commitments abroad
The main defined-benefit plans with employees abroad correspond to those in Mexico, Portugal and the United States, which jointly represent 94% of the total commitments with employees abroad as of December 31, 2011, and 22% of the total commitments with employees in the Group as a whole (95% and 22%, and 94% and 18%, respectively, as of December 31, 2010 and 2009). Those commitments are not available for new employees.
As of December 31, 2011, 2010 and 2009, the breakdown by country of the various commitments with employees of the BBVA Group abroad is as follows:
Post-Employment Commitments Abroad
Pension Commitments
Post-Employment Welfare Benefits
The plan assets related to these commitments are to be used directly to settle the vested obligations and meet the following conditions: they are not owned by the Group entities; they are available only to pay post-employment benefits; and they cannot be returned to the Group entities.
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The vested obligations related to these commitments are presented in the accompanying consolidated balance sheets net of the plan assets recognized under the heading “Provisions – Provisions for pensions and similar obligations” (see Note 25).
Commitments with employees in Mexico –
In Mexico, the main actuarial assumptions used in quantifying the commitments with employees as of December 31, 2011, 2010 and 2009, are as follows:
Post-Employment Actuarial Assumptions in Mexico
Medical cost trend rate
Expected rate of return on plan assets
Pension commitments in Mexico: The changes in these commitments and plan assets in 2011, 2010 and 2009 for all of the Group’s companies in Mexico are as follows:
Pension Commitments and Plan Assets in Mexico:Changes in the period
As of December 31, 2011, 2010 and 2009, the plan assets covering these obligations correspond entirely to fixed-income securities. In 2011, 2010 and 2009, the return on these assets amounted to €45 million, €108 million and€43 million, respectively.
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Post-employment welfare benefits in Mexico: The changes in these calculations reflecting these commitments and plan assets in 2011, 2010 and 2009 for all the Group’s companies in Mexico are as follows:
Welfare Benefits Commitments and Plan Assets inMexico: Changes in the period
As of December 31, 2011, 2010 and 2009, the plan assets covering these obligations corresponded entirely to fixed-income securities, which produced a return amounting to €65, €94 and €44 million, respectively.
The sensitivity analysis to changes in medical cost trend rates for 2011 is as follows:
Welfare Benefits in Mexico. Sensitivity Analysis
Increase/Decrease in current service cost and interest cost
Increase/Decrease in commitments
Pension Commitments in Portugal –
In Portugal, the main actuarial assumptions used in quantifying the commitments with employees as of December 31, 2011, 2010 and 2009, are as follows:
Post-Employment Actuarial Assumptions in Portugal
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The changes in these commitments and plan assets in 2011, 2010 and 2009 for all of the Group’s companies in Portugal are as follows:
Pensions Net Commitments in Portugal: Changes in theperiod
In 2011, in compliance with the new regulations, part of the pensions in payment (€170 million) have been transferred to the Portugues Social Security
The distribution of the main categories of plan assets related to these commitments as of December 31, 2011, 2010 and 2009 for all of the Group’s companies in Portugal is as follows:
Plan Assets Categories in Portugal
Property, Land and Buildings
Other investments
In 2011, 2010 and 2009, the return on plan assets related to these pension commitments reached -€3, -€31, and €24 million, respectively.
Pension commitments in the United States –
In the United States, the main actuarial assumptions used in quantifying the commitments with employees as of December 31, 2011, 2010 and 2009, are as follows:
Post-Employment Actuarial Assumptions in theUnited States
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The changes of these commitments and plan assets in 2011, 2010 and 2009, for all of the Group’s companies in the United States, are as follows:
Pensions Net Commitments in the United StatesChanges in the period
The distribution of the main category of plan assets related to these commitments as of December 31, 2011, 2010 and 2009 for all the companies in the United States is as follows:
Plan Assets Categories for Pension Commitments in the United States
In 2011, 2010 and 2009, the return on plan assets related to these pension commitments reached €67, €20, and €27 million, respectively.
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Post-employment and welfare benefits in other countries –
The changes in these commitments and plan assets in 2011, 2010 and 2009 for all of the Group’s remaining companies abroad are as follows:
Pensions Net Commitments ans Welfare Benefits inOther Countries. Changes in the period
26.2.3 Estimated future payments for commitments with employees in the BBVA Group
The estimated benefit payments over the next ten years for all the companies in Spain, Mexico, Portugal and the United States are as follows:
Expected Future Benefits for Post-Employment Commitments
Commitments Spain
Of which early retirement Spain
Commitments Mexico
Commitments Portugal
Commitments The United States
As of December 31, 2011, BBVA’s share capital amounted to €2,402,571,431.47, divided into 4,903,207,003 fully subscribed and paid-up registered shares, all of the same class and series, at €0.49 par value each, represented through book-entry accounts. All of the Bank shares carry the same voting and dividend rights, and no single stockholder enjoys special voting rights. There are no shares that do not represent an interest in the Bank’s common stock.
The Bank’s shares are traded on the continuous market in Spain, as well as on the London and Mexico stock markets. BBVA American Depositary Shares (ADSs) traded on the New York Stock Exchange are also traded on the Lima Stock Exchange (Peru), under an exchange agreement between these two markets.
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Also, as of December 31, 2011, the shares of BBVA Banco Continental, S.A.; Banco Provincial S.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, the last two also being listed on the New York Stock Exchange. BBVA Banco Francés, S.A. is also listed on the Latin American market of the Madrid Stock Exchange.
As of December 31, 2011, Manuel Jove Capellán owned 5.046% of BBVA common stock through the company Inveravante Inversiones Universales, S.L. At that date, State Street Bank and Trust Co., Chase Nominees Ltd. and The Bank of New York Mellon, SA NV, in their capacity as international custodian/depositary banks, held 7.49%, 7.13% and 3.73% of BBVA common stock, respectively. Of said positions held by the custodian banks, BBVA is not aware of any individual shareholders with direct or indirect holdings greater than or equal to 3% of the BBVA common stock.
On February 4, 2010, the Blackrock, Inc. company reported to the Spanish Securities and Exchange Commission (CNMV) that, as a result of the acquisition (on December 1, 2009) of the Barclays Global Investors (BGI) company, it now has an indirect holding of BBVA common stock totaling 4.45% through the Blackrock Investment Management Company.
BBVA is not aware of any direct or indirect interests through which control of the Bank may be exercised. BBVA has not received any information on stockholder agreements including the regulation of the exercise of voting rights at its annual general meetings or restricting or placing conditions on the free transferability of BBVA shares. No agreement is known that could give rise to changes in the control of the Bank.
The changes in the heading “Common Stock” of the accompanying consolidated balance sheets were due to the following common stock increases:
“Dividend Option” Program: The AGM held on March 11, 2011, under Point Five of the Agenda, resolved to perform two common stock increases, charged to voluntary reserves to implement the program called the “Dividend Option”. This confers authority on the Board of Directors, pursuant to article 297.1 a) of the Corporations Act, to indicate the date on which said common stock increases must be carried out, within one year of the date on which the agreements are made.
The BBVA Board of Directors, at its meeting on March 29, 2011 agreed to carry out the first of the common stock increases charged to reserves, mentioned above, in accordance with the terms and conditions of the “Dividend Option” program. As a result of this increase, the Bank’s common stock increased by €29,740,199.65, through the issue and circulation of 60,694,285 shares with a €0.49 par value each.
Likewise, BBVA’s Board of Directors, at its meeting on September 27, 2011, agreed to carry out the second common stock increase under the heading of reserves, in accordance with the terms and conditions agreed upon by the AGM of March 11, 2011. As a result of this increase, the Bank’s common stock increased by €38,422,617.94 through the issue and circulation of 78,413,506 shares with a €0.49 par value each.
Convertible bonds: The Board of Directors of BBVA, at its meeting on June 22, 2011, agreed to the mandatory conversion of all convertible bonds issued in September 2009 (see Note 23.4). The conversion took place on July 15, 2011, an interest payment date, according to the procedure established to that effect under the terms and conditions of the issue.
As a result of the conversion, an increase of the Bank’s common stock was carried out (previously approved by the Board of Directors at its meeting on July 27, 2009, in using the power delegated by the Annual General Meeting held on March 14, 2008 in point 6 of the Agenda) through the issue and circulation of 273,190,927 ordinary BBVA shares with a €0.49 par value each.
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The price of the conversion was established, pursuant to the terms and conditions of the issue, as the arithmetic mean of the closing prices of the BBVA share in the Spanish stock market in the five days of trading prior to July 15, 2011, which was €7.3206 per share.
As a result, and in accordance with the conversion agreed upon by the Bank’s Board of Directors at its meeting on June 22, 2011, the common stock increase due to the conversion of those bonds totaled a nominal amount of €133,863,554.23; the total share premium stood at €1,866,057,945.96 (see Note 28).
The BBVA Board of Directors, at a meeting held on November 1, 2010, agreed, under the delegation conferred by the AGM on March 13, 2009, under Point Five of the Agenda, carried out an increase of the Bank’s common stock with a preemptive subscription right for shareholders. This common stock increase was €364,040,190.36, through the issue and circulation of 742,939,164 new ordinary shares with a €0.49 par value each and represented through book-entry accounts. The subscription price of the shares was €6.75 per share, of which€0.49 corresponded to the par value and €6.26 corresponded to the share premium (see Note 28); therefore, the total effective amount of the common stock increase was €5,014,839,357.
Other resolutions of General Shareholders Meeting on the issue of shares and other securities –
Common stock Increases: The Bank’s AGM held on March 11, 2011 agreed, in Point Six of the Agenda, to confer authority on the Board of Directors to increase common stock in accordance with that stipulated in Article 297.1b) of the Corporations Act, on one or several occasions, within the legal deadline of five years from the date the Agreement takes effect, up to the maximum nominal amount of 50% of the subscribed and paid common stock on the date on which the resolution is adopted; that is €1,100,272,529.82. Likewise, an agreement was made to enable the Board of Directors to exclude the preemptive subscription right on those common stock increases in line with the terms of Article 506 of the Corporations Act. This authority is limited to 20% of the common stock of the Bank on the date the agreement is adopted.
Convertible securities: At the AGM held on March 14, 2008 the shareholders resolved to delegate to the Board of Directors for a five-year period the right to issue bonds, convertible and/or exchangeable into BBVA shares for a maximum total of €9,000 million. The powers include the right to establish the different aspects and conditions of each issue, including the power to exclude pre-emptive subscription right of shareholders in accordance with the Corporations Act, to determine the basis and methods of conversion and/or to exchange the Bank’s common stock to address the commitments acquired as a result of those issues.
Under this authorization, the Board of Directors of the Bank agreed at its meeting on July 27, 2009 to issue €2,000 million euros of convertible bonds, excluding the preemptive subscription right. The issue took place in September 2009 (see Note 23.4), and the conversion of all of the bonds in newly issued BBVA shares was completed on July 15, 2011.
Under this authorization, the Board of Directors of the Bank agreed at its meeting on November 22, 2011 to issue €3,475 million euros of convertible bonds. The issue of these convertible bonds is exclusively designed for the holders of retail preferred securities issued by BBVA Capital Finance, S.A.U. and BBVA International Limited, all secured by BBVA within the framework of the purchase offer for those preferred securities presented by the Company, and consequently excluding the shareholders’ preemptive subscription rights.
Finally, on December 30, 2011, mandatory convertible bonds were issued, by virtue of the subscription orders received, for a total amount of three billion four-hundred thirty million two-hundred euros (€3,430,000,200).
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Other securities: The Bank’s AGM held on March 11, 2011 agreed to delegate to the Board of Directors, the authority to issue, within the five-year maximum period stipulated by law, on one or several occasions, directly or through subsidiaries, with the full guarantee of the Bank, any type of debt instruments, documented in obligations, bonds of any kind, promissory notes, all type of covered bonds, warrants, mortgage participation, mortgage transfers certificates and preferred securities (that are totally or partially exchangeable for shares already issued by the company itself, in the market or which can be settled in cash), or any other fixed-income securities, in euros or any other currency, that can be subscribed in cash or in kind, registered or bearer, unsecured or secured by any kind of collateral, including a mortgage guarantee, with or without incorporation of rights to the securities (warrants), subordinate or otherwise, for a limited or indefinite period of time, up to a maximum nominal amount of€250,000 million.
The changes in the balances under this heading in the accompanying consolidated balance sheets are due to the common stock increases carried out in 2011 and 2010 (see Note 27).
The amended Spanish Corporation Act expressly permits the use of the share premium balance to increase capital and establishes no specific restrictions as to its use.
The breakdown of the balance for the main headings in the accompanying consolidated balance sheets is as follows:
Reserves. Breakdown by concepts
Restricted reserve for retired capital
Reserves for balance revaluations
Total reserves holding company (*)
Consolidation reserves attributed to the Bank and dependents consolidated companies.
Total Reserves
Total reserves of BBVA, S.A. (See Apendix I).
29.1 Legal reserve
The legal reserve can be used to increase the common stock provided that the remaining reserve balance does not fall below 10% of the increased capital. While it does not exceed 20% of the common stock, it can only be allocated to offset losses exclusively in the case that there are not sufficient available reserves available.
Under the amended Corporations Act, 10% of any profit made each year must be transferred to the legal reserve until the balance of this reserve reaches 20% of the share capital. This limit of 20% of legal reserve will be reached by the Bank once the proposal for the allocation of the 2011 earnings is approved (see Note 4).
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29.2 Restricted reserves
As of December 31, 2011, 2010 and 2009, the Bank’s restricted reserves are as follows:
Restricted Reserves
Restricted reserve for Parent Company shares and loans for those shares
Restricted reserve for redenomination of capital in euros
The restricted reserve for retired capital originated in the reduction of the nominal par value of the BBVA shares made in April 2000.
The most significant heading corresponds to restricted reserves related to the amount of shares issued by the Bank in its possession at each date as well as by the amount of customer loans outstanding at those dates that were granted for the purchase of, or are secured by, the Bank’s shares.
Finally, pursuant to Law 46/1998 on the introduction of the euro, a restricted reserve is recognized as a result of the rounding effect of the redenomination of the Bank’s common stock in euros.
Furthermore, in the individual financial statements for subsidiaries as of December 31, 2011, 2010 and 2009, restricted reserves for a total of €2,940,€2,612 and €2,140 million, respectively, were taken into consideration.
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29.3 Reserves (losses) by entity
The breakdown, by company or corporate group, under the heading “Reserves” in the accompanying consolidated balance sheets is as follows:
For the purpose of allocating the reserves and accumulated losses to the consolidated companies and to the holding, the transfers of reserves arising from the dividends paid and transactions between these companies are taken into account in the period in which they took place.
Reserves Assigned to the Consolidation Process
Holding Company (*)
Grupo BBVA Bancomer
BBVA Seguros, S.A.
BBVA Luxinvest, S.A.
Grupo BBVA Banco Provincial
Corporacion General Financiera, S.A.
Grupo Chile
Compañía de Cartera e Inversiones, S.A.
Cidessa Uno, S.L.
Anida Grupo Inmobiliario, S.L.
BBVA Suiza, S.A.
Grupo BBVA Continental
BBVA Panamá, S.A.
BBVA Ireland Public Limited Company
Bilbao Vizcaya Holding, S.A.
Grupo BBVA Puerto Rico
Finanzia, Banco de Crédito, S.A. (**)
Grupo Colombia
Compañía Chilena de Inversiones, S.L.
Grupo BBVA Banco Francés
Participaciones Arenal, S.L.
Grupo BBVA Portugal
BBVA Propiedad S.A, (formerly BBVA Propiedad, F.I.I.)
Anida Operaciones Singulares, S.L.
Grupo BBVA USA Bancshares
Reserves (losses) of entities accounted for using the equity method:
Grupo CITIC
Tubos Reunidos, S.A.
Servired Sociedad Española de Medios de Pago, S.A
Corporación IBV Participaciones Empresariales, S.A.
Hestenar, S.L.
Correspond to the Reserve of the Bank after adjustments made by the consolidation process.
Entity absorbed by BBVA, S.A. for accounting purposes as of January 1, 2011
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In 2011, 2010 and 2009 the Group companies performed the following transactions with shares issued by the Bank:
Treasury Stock
+ Purchases
- Sales and other changes
+/- Derivatives over BBVA shares
Held by BBVA, S.A.
Held by Corporación General Financiera, S.A.
Held by other subsidiaries
Average purchase price in euros
Average selling price in euros
Net gain or losses on transactions (Srockholders’ funds-Reserves)
The percentages of treasury stock held by the Group in 2011, 2010 and 2009 are as follows:
% treasury stock
The number of BBVA shares accepted by the Group in pledge as of December 31, 2011, 2010 and 2009 is as follows:
Shares of BBVA Accepted in Pledge
Number of shares in pledge
Nominal value
% of share capital
The number of BBVA shares owned by third parties but managed by a company in the Group as of December 31, 2011, 2010 and 2009 is as follows:
Shares of BBVA Owned by Third Parties but Managed by the Group
Number of shares property of third parties
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Valuation Adjustments
Hedging of net investments in foreign transactions
Other valuation adjustments (*)
Actuarial gains and losses (see note 2.2.12)
The balances recognized under these headings are presented net of tax.
The breakdown by groups of consolidated companies of the balance under the heading “Non-controlling interests” of total equity in the accompanying consolidated balance sheets is as follows:
Non-Controlling Interest
BBVA Colombia Group
BBVA Chile Group
BBVA Banco Continental Group
BBVA Banco Provincial Group
BBVA Banco Francés Group
Other companies
These amounts are broken down by groups of consolidated companies under the heading “Net income attributed to non-controlling interests” in the accompanying consolidated income statements:
Net Income attributed to Non-Controlling Interests
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Capital base
Bank of Spain Circular 3/2008, of 22 May 2008, and its subsequent amendments (the most recent by Bank of Spain Circulars 4/2001, of 30 November 2011, and 9/2010 of 22 December 2010), on the calculation and control of minimum capital base requirements, regulate the minimum capital base requirements for Spanish credit institutions – both as individual entities and as consolidated groups – and how to calculate them, as well as the various internal capital adequacy assessment processes they should have in place and the information they should disclose to the market.
The minimum capital base requirements established by Circular 3/2008 are calculated according to the Group’s exposure to credit and dilution risk, counterparty and liquidity risk relating to the trading portfolio, exchange rate risk and operational risk. In addition, the Group must fulfill the risk concentration limits established in said Circular and the internal Corporate Governance obligations.
Circular 3/2008 implements Spanish regulations on capital base and consolidated supervision of financial institutions, as well as adapting Spanish law to the relevant European Union Capital Requirements Directives, in compliance with the accords by the Committee on Banking Supervision of the Bank for International Settlements in Basel.
Specifically, within the framework of the new accords reached by this Committee, and its implementation by the European Commission, the transfer process to the Spanish solvency regulations under CRD2 (Directives 2009/111, 2009/27 and 2009/83) and CRD3 (Directive 2010/76) was completed. Thus, modifications affecting the definition of eligible capital, transactions related to securitizations, the monitoring of remuneration policies, management of liquidity risks and the requirements for financial instruments held for trading were incorporated into the Spanish regulatory framework.
The BBVA Group is adapting the ongoing regulatory changes and, in addition, is preparing for the significant modifications that will take place in the regulatory framework for solvency of financial entities in 2013, as regards the capital framework for banks (known as “Basel III”) and insurance entities (“Solvency II”):
As of December 31, 2011, 2010 and 2009, the Group’s capital exceeded the minimum capital base level required by Bank of Spain regulations in force on each date as shown below:
Capital Base
Basic equity
Parent company reserves
Reserves in consolidated companies
Non-controlling interests
Deductions (Goodwill and others)
Attributed net income (less dividends)
Additional equity
Other deductions
Additional equity due to mixed group (**)
Total Equity
Minimum equity required
Provisional data.
Mainly insurance companies in the Group.
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The main changes in 2011 in the amounts of capital resources shown in the above table have been:
The capital increases under the “Dividend Option” program mentioned in Notes 4 and 27.
The goodwill recognized for the acquisition of Garanti mentioned in Note 20.1, which increases the deduction in Capital Base.
The impairment of goodwill of the CGU of the United States mentioned in Note 20.1, which reduces the deduction in Capital Base.
The operation involving the repurchase of preferred securities and subsequent issue of convertible bonds, mentioned in Note 23.4.
However, the conversion of the Convertible Bonds mentioned in Notes 23.4 and 27 has had no impact on the total calculation of the Group’s capital base, given that said bonds were already considered eligible for the purposes of the Group’s basic funds from the date on which they were subscribed and paid since they were obligatorily convertible upon maturity.
In addition to that established in Circular 3/2008, Spanish financial groups and entities must comply with the capital requirements set forth by Royal Decree-Law 2/2011 of 18 February 2011 reinforcing the Spanish financial system. This standard was issued for the purpose of reinforcing the solvency of the Spanish financial entities. It thus established a new minimum requirement in terms of core capital on risk-weighted assets which is more restrictive than the one set out in the aforementioned Circular, and that must be greater than 8% or 10%, as appropriate. This new ratio, which had a temporary purpose, had to be satisfied prior to March 10, 2011, without the BBVA Group having to take any extraordinary actions to adapt to it.
As of December 31, 2011, the Group’s capital exceeded the minimum capital base level required by Royal Decree-Law 2/2011, together with the last issue of mandatory convertible bonds into shares (at the discretion of the issuer on any date of the payment of the remuneration), that comply with the eligibility requirements of the European Banking Authority (EBA), totaled approximately €5,700 million.
Stress test and new recommendations on minimum capital levels
In the first half of 2011, 91 of the main European financial institutions underwent stress tests coordinated by the European Banking Authority (EBA) in cooperation with the European Central Bank (ECB), the European Commission and the European Systemic Risk Board (ESRB).
The results of these stress tests, released on July 15, 2011, showed that the BBVA Group was one of the European institutions that best maintained its solvency levels, even in the most adverse scenario anticipated at the time, which incorporated the impact of a possible sovereign risk crisis and a substantial reduction in the valuation of the real estate assets.
On October 26, 2011, the EBA, in cooperation with the competent national authorities, announced the conducting of a study on the capital levels of 71 financial institutions throughout Europe based on data available as of September 30, 2011.
As a result of this study and in order to restore market confidence in the European financial system, the EBA issued the recommendation of reaching, as of June 30, 2012, a new minimum capital level in the ratio known as Core Tier 1 (“CT1”), on an exceptional and temporary basis, in order to address, among other issues, the current situati0n of the sovereign risk crisis in Europe. This new recommended level is temporary in nature; as such, the EBA has announced its intention to lift it once confidence in the European financial markets is restored.
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Based on the information released on December 8, 2011, the BBVA Group would need to increase its capital base by €6,329 million in order to reach this minimum level set for the CT1 ratio as of June 30, 2012. Of this amount, €2,313 million correspond to the temporary increase in the capital base for exposure to the aforementioned sovereign risk.
On January 20, 2012, the BBVA Group submitted to the Bank of Spain a specific action plan following the recommendations of the EBA that will enable it to reach the minimum level set for the CT1 ratio at the end of June 2012. This plan is being examined by the Bank of Spain jointly with the EBA.
The measures already taken under this plan include the issue of convertible subordinated debentures completed on December 30, 2011 (see Note 23.4). This action, together with organic generation of capital and other additional measures envisaged in the plan will enable the BBVA Group to comply with the recommendations issued by the EBA without having to apply for government aid. As of December 31, 2011, 84% of the recommended capital base increase had been reached.
Capital management
Capital management in the BBVA Group has a twofold aim:
Maintain a level of capitalization according to the business objectives in all countries in which it operates and, simultaneously,
Maximize the return on shareholders’ funds through the efficient allocation of capital to the different units, a good management of the balance sheet and appropriate use of the various instruments forming the basis of the Group’s equity: shares, preferred securities and subordinate debt.
This capital management is carried out in accordance with the criteria of the Bank of Spain Circular 3/2008 and subsequent amendments both in terms of determining the capital base and the solvency ratios.
This regulation allows each entity to apply its own internal ratings based (IRB) approach to risk and capital management. The BBVA Group carries out an integrated management of these risks in accordance with its internal policies (see Note 7) and its internal capital estimation model has received the Bank of Spain’s approval for certain portfolios.
Capital is allocated to each business area of the BBVA Group (see Note 6) according to economic risk capital (ERC) criteria, which are based on the concept of unexpected loss with a specific confidence level, as a function of a solvency target determined by the Group, at two levels:
Core capital, which determines the allocated capital and is used as a reference to calculate the return on equity (ROE) generated by each business; and
Total capital, which determines the additional allocation in terms of subordinate debt and preferred securities.
Due to its sensitivity to risk, CaR is an element linked to management policies of the BBVA Group businesses themselves. It standardizes capital allocation between them in accordance with the risks incurred and makes it easier to compare profitability. The calculation of the CaR combines credit risk, market risk, structural risk associated with the balance sheet, equity positions, operational risk, fixed assets risks and technical risks in the case of insurance companies. Internal models were used that have been defined following the guidelines and requirements established under the Basel II Capital Accord, with economic criteria prevailing over regulatory ones.
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Financial Guarantees and Drawable by Third Parties
Contingent Risks
Collateral, bank guarantees and indemnities
Total Contingent Risks
Contingent Commitments
Drawable by third parties:
Government and other government agency
Total Contingent Commitments
Total contingent Risks and Commitments
Since a significant portion of the amounts above will reach maturity without any payment obligation materializing for the consolidated companies, the aggregate balance of these commitments cannot be considered as an actual future requirement for financing or liquidity to be provided by the BBVA Group to third parties.
In 2011, 2010 and 2009 no issuances of debt securities carried out by associate entities of the BBVA Group, jointly controlled entities (accounted for using the equity method) or non-Group entities have been guaranteed.
In addition to those mentioned in other notes in these annual financial statements (seeNotes 13 and 26) as of December 31, 2011, 2010 and 2009, the assets of consolidated entities that guaranteed their own obligations amounted to€101,108 million,€81,631 million and€81,231 million, respectively. These amounts mainly correspond to the issue of long-term covered bonds (see Note 23.3) which, pursuant to the Mortgage Market Act, are admitted as third-party collateral (€62,908 million as of December 31, 2011) and to assets allocated as collateral for certain lines of short-term finance assigned to the BBVA Group by central banks (€35,916 million as of December 31, 2011).
As of December 31, 2011, 2010 and 2009, there were no other BBVA Group assets linked to any third-party obligations.
As of December 31, 2011, 2010 and 2009, there were no contingent assets or liabilities for significant amounts other than those registered in the financial statements attached.
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The breakdown of sale and purchase commitments of the BBVA Group as of December 31, 2011, 2010 and 2009 is as follows:
Purchase and Sale Commitments
Financial instruments sold with repurchase commitments
Central Banks
Credit Institutions
Financial instruments purchased with resale commitments
Below is a breakdown of the maturity of other future payment obligations, not registered in previous Notes, due later than December 31, 2011:
Maturity of Future Payment Obligations
Purchase commitments
Technology and systems projects
Other projects
As of December 31, 2011, 2010 and 2009, the details of the most significant items under this heading are as follows:
Transactions on Behalf of Third Parties
Financial instruments entrusted by third parties
Conditional bills and other securities received for collection
Securities received in credit
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As of December 31, 2011, 2010 and 2009, the off-balance sheet customer funds managed by the BBVA Group are as follows:
Off-Balance Sheet Customer Funds by Type
Commercialized by the Group
Investment companies and mutual funds
Customer portfolios managed on a discretionary basis
Portfolios managed on a discretionary
Commercialized by the Group managed by third parties outside the Group
Saving insurance contracts
39.1. Interest and similar income
The breakdown of the interest and similar income recognized in the accompanying consolidated income statement is as follows:
Interest and Similar Income. Breakdown by Origin.
Resident sector
Non resident sector
Held for trading
Available-for-sale financial assets and held-to-maturity investments
Rectification of income as a result of hedging transactions
Insurance activity
Other income
The amounts recognized in consolidated equity during the year in connection with hedging derivatives and the amounts derecognized from consolidated equity in 2011, 2010 and 2009 and taken to the consolidated income statement during the year are disclosed in the accompanying consolidated statements of recognized income and expenses.
The following table shows the adjustments in income resulting from hedge accounting, broken down by type of hedge:
Adjustments in Income Resulting from Hedge Accounting
Fair value hedging
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39.2. Interest and similar expenses
The breakdown of the balance under this heading in the accompanying consolidated income statements is as follows:
Interest and Similar Expenses. Breakdown by Origin
Bank of Spain and other central banks
Customers deposits
Rectification of expenses as a result of hedging transactions
Cost attributable to pension funds (Note 26)
Other charges
The following table shows the adjustments in expenses resulting from hedge accounting, broken down by type of hedge:
Adjustments in Expenses Resulting from Hedge Accounting
39.3. Average return on investments and average borrowing cost
The detail of the average return on investments in 2011, 2010 and 2009 is as follows:
Asset
Securities portfolio and derivatives
Euros
Foreign currency
Other finance income
Totals
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The average borrowing cost in 2011, 2010 and 2009 is as follows:
Other finance expenses
The change in the balance under the headings “Interest and similar income” and “Interest and similar expenses” in the accompanying consolidated income statements is the result of changing prices (price effect) and changing volume of activity (volume effect), as can be seen below:
Interest Income and Expense andSimilar Items. Change in the Balance
Interest and similar incomes
Net Interest Income
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The volume effect is calculated as the result of the interest rate of the initial period multiplied by the difference between the average balances of both periods.
The price effect is calculated as the result of the average balance of the last period multiplied by the difference between the interest rates of both periods.
The balances for this heading in the accompanying consolidated income statements correspond to dividends on shares and equity instruments other than those from shares in entities accounted for using the equity method (see Note 41), as can be seen in the breakdown below:
Dividend Income
Dividends from:
The breakdown of the share of profit or loss of entities accounted for using the equity method in the accompanying consolidated income statements is as follows:
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Fee and Commission Income
Bills receivables
Credit and debt cards
Counselling on and management of one-off transactions
Financial and similar counselling services
Fee and Commission Expenses
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The breakdown of the balance under this heading, by source of the related items, in the accompanying consolidated income statements is as follows:
Gains (Losses) on Financial Assets and LiabilitiesBreakdown by Heading of the Balance Sheet
Other financial instruments not designated at fair value through profit or loss
The breakdown of the balance under this heading in the accompanying income statements by the nature of financial instruments is as follows:
Gains (Losses) on Financial Assets and LiabilitiesBreakdown by Nature of the Financial Instrument
Debt instruments
The breakdown of the balance of the impact of the derivatives (trading and hedging) under this heading in the accompanying consolidated income statements is as follows:
Derivatives Trading and Hedging
Interest rate agreements
Security agreements
Commodity agreements
Credit derivative agreements
Foreign-exchange agreements
Other agreements
Hedging Derivatives Ineffectiveness
Hedging derivative
Hedged item
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In addition, in 2011, 2010 and 2009, under the heading “Exchange differences (net)” of the income statement, net amounts of positive €5 million, negative €287 million and positive €52 million, respectively, were registered for transactions with foreign exchange trading derivatives.
The breakdown of the balance under the heading “Other operating income” in the accompanying consolidated income statements is as follows:
Other Operating Income
Of Which: Real estate companies
Of Which: Net operating income from rented buildings
The breakdown of the balance under the heading “Other operating expenses” in the accompanying consolidated income statements is as follows:
Other Operating Expenses
Change in inventories
Of Which: Contributions to guaranted banks deposits funds
46.1 Personnel expenses
Personnel Expenses
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The breakdown of the average number of employees in the BBVA Group in 2011, 2010 and 2009, by professional categories and geographical areas, is as follows:
Average Number of Employees by Geographical Areas (*)
Spanish banks
Executive managers
Other line personnel
Clerical staff
Branches abroad
Companies abroad
Pension fund managers
Other non-banking companies
Turkey is not included.
The breakdown of the average number of employees in the BBVA Group as of December 31, 2011, 2010 and 2009, by categories and gender, is as follows:
Number of Employees at the end of year
Professional Category and Gender
46.1.1 BBVA Group general remuneration policy
The BBVA Group considers its remuneration policy to be a key element in value creation. Therefore, the Group has developed an advanced remuneration scheme based on the reciprocal generation of value for employees and for the Group that is in line with the interests of the shareholders and that hinges on prudent risk management.
The Group’s remuneration policy includes, amongst others, the following elements:
Fixed remuneration based on the level of responsibility, which constitutes a significant part of the total compensation.
Variable remuneration that is linked to the realization of previously-defined objectives and prudent management of risks, and also takes current and future risks into consideration.
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In the general framework of its remuneration policy, BBVA has introduced several principles to be applied specifically to the group of individuals who, within the BBVA Group, carry out professional activities that could significantly affect the entity’s risk profile or who exercise supervisory functions. These individuals include the executive directors and members of the Management Committee, who are listed below.
In the total remuneration, the fixed and variable components are duly balanced, and the fixed component is sufficient to allow the variable remuneration elements to be designed in a flexible manner.
In the case of employees who carry out supervisory functions, the variable remuneration will depend more heavily on the objectives related to their functions, by favoring their independence in terms of the business areas they supervise.
The variable remuneration scheme seeks a balance between the amounts to receive in cash and in shares or financial instruments.
The payments of a part of the total variable remuneration are deferred.
Clauses have been established that may limit or impede, in certain cases, the receipt of part of the outstanding deferred variable remuneration.
Based on these principles, a specific settlement and payment system for Annual Variable Remuneration was developed. It is made up of an ordinary variable remuneration, applicable to all employees, and a specific incentive in shares for the management team, the group indicated above. It has been adapted to the requirements established in Directive 76/2010, which was transposed to Spanish law by means of Royal Decree 771/2011, and is as follows:
For each one of the Annual Variable Remuneration payments, at least 50 percent of the total will be paid in BBVA shares.
The payment of 40 percent of the Annual Variable Remuneration, both from the part in cash and the part paid in shares, will be deferred. The deferred amount will be paid out in thirds over the next three years.
The percent deferred increases in the case of executive directors and members of the Management Committee up to 50 percent of their Annual Variable Remuneration.
The shares that are paid will be unavailable for a period of one year starting from the date of their provision. This retention is applied on the net amount of the shares, after discounting the part necessary to make the tax payment for the shares received.
No hedging transactions can be carried out on the shares received as Annual Variable Remuneration.
46.1.2 Equity-instrument-based employee remuneration
BBVA understands that to better align the interests of its shareholders and to promote the generation of long-term value, it must maintain a specific variable share-based remuneration system for the Bank’s executives, considering their special influence on the Group’s strategy and earnings.
Multi-year Variable Remuneration Plan 2010/2011
The Bank’s Annual General Meeting held on March 12, 2010 approved a Multi-Year Variable Share-Based Remuneration Program for 2010/2011 designed for the members of BBVA’s executive team. The result is obtained by multiplying the number of units assigned at the start of the Program to each beneficiary by a coefficient, between 0 and 2, established based on the evolution of the Bank’s total shareholders return (TSR) in 2010/2011 as compared to the evolution of this same indicator in a group of 18 international reference banks.
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Once the Program’s duration is finalized, on December 31, 2011, a multiplier coefficient of 2 is applied to the units assigned to each beneficiary. These units reached 3,215,909 as of December 31, 2011.
This Program incorporated some restrictions to granting shares to the beneficiaries after the settlement. These shares are available as follows:
40 percent of the shares received shall be freely transferable by the beneficiaries at the time of their delivery;
30 percent of the shares are transferable one year after the settlement date of the Program; and
The remaining 30 percent are transferable starting two years after the settlement date of the Program.
After this Program was established by the AGM, Royal Decree 771/2011 was published demanding the application of certain deferment, unavailability and limitation regulations to the remuneration granted and still unpaid prior to it taking effect, referring to services rendered since 2010.
Thus, this standard and the requirements established in the aforementioned Royal Decree 771/2011 must be applied to the 2010/2011 Program. Therefore, the AGM of the Bank set for March 16, 2012 will address the modification of the settlement and payment system of the 2010/2011 Program previously approved by the AGM to adapt it to the terms established in Royal Decree 771/2011. These specific standards will only apply to those executives, including executive directors and members of the Management Committee, who are beneficiaries of this Program and whose professional activity may significantly influence the entity’s risk profile. The settlement and payments of the shares corresponding to this Program will be made in line with the scheme defined for that effect, as explained in Note 56.
BBVA Compass Long-Term Incentive Plan –
The Remuneration Committee of BBVA Compass has approved various long-term remuneration plans with BBVA shares for members of the management team and key employees of the entity and its affiliates. Currently, the following programs are in effect:
2009-2011 Plan: On November 27, 2009, the Remuneration Committee of BBVA Compass agreed to increase the number of ADS in the existing plan and set up a new plan for the 2009-2011 period, with a completion date of December 31, 2011.
This plan consists of granting “units” or theoretical shares to management staff (similar to those described above) and the granting of “restricted share units” to the rest of the beneficiaries of the Plan.
2010-2012 Plan: In May 2010, the Remuneration Committee of BBVA Compass approved a new long-term share-based remuneration plan solely for members of the executive team of BBVA Compass and its affiliates, for the period 2010-2012, with the completion date on December 31, 2012.
As of December 31, 2011, the maximum number of “units” and “restricted share units” for covering the payment from both plans was 1,727,384. During the period of operation of each of these plans, the sum of the commitment to be accounted for at year-end is obtained by multiplying the number of “units” assigned by the expected share price and the expected value of the multiplier coefficient, both estimated at the date of the entry into force of each of the plans.
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Variable Share-based Remuneration System
BBVA’s Ordinary General Meeting of Shareholders held on March 11, 2011 approved a new variable share-based remuneration system for BBVA’s executive team (hereinafter, “the System”).
This new system is based on a specific incentive for the members of the Executive Team (the “Incentive”). It consists of the annual allocation, to each beneficiary, of a number of units that serve as the basis for determining the number of shares that, if applicable, will correspond to them in the settlement of the Incentive based on the level of compliance with three indicators: Total Shareholder Return (TSR), the Group’s attributed net income and the Group’s recurrent Economic Profit (EP). Each of these indicators is scored from 0 to 2, based on the level achieved.
Once the Incentive terminated, on December 31, 2011, a multiplier coefficient of 1.3175 was applied to the units assigned to the beneficiaries. These units reached 6,604,768 as of December 31, 2011.
The resulting shares are subject to the following retention criteria:
30 percent of the shares are transferable one year after the settlement date of the incentive; and
The remaining 30 percent are transferable starting two years after the settlement date of the incentive.
However, for those executives, including executive directors and members of the Management Committee, who are beneficiaries of this Incentive and whose professional activity may significantly influence the entity’s risk profile, special regulations for settlement and payments are applied to their Annual Variable Remuneration System. This is in line with the scheme defined for that effect, as explained in Note 56.
The cost of said plans is accrued throughout their life. The expense associated in 2011, 2010 and 2009 for those plans reached €51 million, €33 million and €18 million, respectively. It is recognized under the heading “Personnel expenses – Other personnel expenses” in the accompanying consolidated income statements, and a balancing entry has been made under the heading “Stockholders’ funds – Other equity instruments” in the accompanying consolidated balance sheets, net of tax effect.
46.2 General and administrative expenses
General and Administrative Expenses
Of which: Rent expenses (*)
Taxes
Other administration expenses
The consolidated companies do not expect to terminate the lease contracts early.
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Depreciation and Amortization
Operating lease
Other Intangible assets
In 2011, 2010 and 2009, the net allowances charged to the income statement under the headings “Provisions for pensions and similar obligations”, “Provisions for contingent risks and commitments”, “Provisions for taxes and other legal contingencies” and “Other provisions” in the accompanying consolidated income statements are as follows:
Provisions (Net)
Other Provisions
The breakdown of impairment losses on financial assets by the nature of those assets in the accompanying consolidated income statements is as follows:
Impairment Losses on Financial Assets (Net)
Recovery of written-off assets
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The impairment losses on non-financial assets broken down by the nature of those assets in the accompanying consolidated income statements are as follows:
Impairment Losses on Other Assets (Net)
Gains and Losses on Derecognized Assets Not
Classified as Non-current Assets Held for Sale
Gains
Disposal of investments in entities
Disposal of tangible assets and other
Losses:
The main headings included in the balance under this heading in the accompanying consolidated income statements are as follows:
Gains (Losses) in Non-current Assets Held for Sale
Gains for real estate
Foreclosed
Sale of buildings for own use (Note 16.1)
Impairment of non-current assets held for sale
Gains on sale of available-for-sale financial assets
“Gains for real estate” for 2011, 2010 and 2009 correspond, fundamentally, to the sale of real estate in Spain with subsequent leaseback by the Group. Profits on sales of €67, €273 and €914 million for 2011, 2010 and 2009, respectively, were generated (Note 16.1).
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Cash flows from operating activities increased in 2011 by €19,811 million (€8,503 million in 2010). The most significant causes of the change in 2011 occurred under the headings of “Loans and receivables”, “Financial liabilities at amortized cost”, “Available-for-Sale Financial Assets” and “Financial instruments held for trading”.
The most significant variations in cash flows in investing activities in 2011 correspond to the headings “Subsidiaries and other business units” for the purchase of a 25.01% holding in the share capital of Turkiye Garanti Bankasi, AS (Note 3); “Tangible assets” for new property, plants and equipment for own use and finance leases granted (Note 19); “Non-current assets held for sale” for net entries in foreclosed assets (Note 16) and “Held-to-maturity” for amortizations of the portfolio (Note 14).
Cash flows from financing activities decreased in 2011 €1,269 million (€1,148 million up in 2010), corresponding to the most significant changes in 2011 in the acquisition and amortization of own equity instruments.
The table below breaks down the main cash flows related to investing activities in 2011, 2010 and 2009:
Main Cash Flows in Investing Activities2011
Other settlements related to investment activities
Main Cash Flows in Investing Activities
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The details of the fees for the services contracted by the companies of the BBVA Group in 2011 with their respective auditors and other audit companies are as follows:
Fees for Audits Conducted
Audits of the companies audited by firms belonging to the Deloitte worldwide organization and other reports related with the audit
Other reports required pursuant to applicable legislation and tax regulations issued by the national supervisory bodies of the countries in which the Group operates, reviewed by firms belonging to the Deloitte worldwide organization
Fees for audits conducted by other firms
In 2011, other companies in the BBVA Group contracted other services (other than audits) as follows:
Other Services Contracted
Firms belonging to the Deloitte worldwide organization
Other firms
Including €908 thousand related to fees for tax services.
The services provided by our auditors meet the independence requirements established under Law 44/2002, of 22 November 2002, on Measures Reforming the Financial System and by the Sarbanes-Oxley Act of 2002 adopted by the Securities and Exchange Commission (SEC); accordingly they did not include the performance of any work that is incompatible with the auditing function.
As financial institutions, BBVA and other companies in the Group engage in transactions with related parties in the normal course of their business. All of these transactions are of little relevance and are carried out in normal market conditions.
55.1 Significant transactions with shareholders
As of December 31, 2011, the balances of transactions with significant shareholders (see Note 27) correspond to “Customer deposits”, at €32 million, “Loans and advances to customers”, at€191 million and “Contingent Risk”, at €29 million, all of them in normal market conditions.
55.2 Transactions with BBVA Group entities
The balances of the main aggregates in the accompanying consolidated balance sheets arising from the transactions carried out by the BBVA Group with associates and jointly controlled companies accounted for using the equity method (see Note 2.1), are as follows:
Balances arising from transactions with Entities of the Group
Assets:
Liabilities:
Memorandum accounts:
F-171
The balances of the main aggregates in the accompanying consolidated income statements resulting from transactions with associated and jointly controlled entities that are consolidated by the equity method, are as follows:
Balances of Income Statement arising from transactions with Entitiesof the Group
Income statement:
Financial incomes
Financial costs
There were no other material effects in the consolidated financial statements arising from dealings with these companies, other than the effects from using the equity method (see Note 2.1), and from the insurance policies to cover pension or similar commitments, as described in Note 26. As of December 31, 2011, the notional amount of the futures transactions arranged by the BBVA Group with those companies amounted to €827 million (of which, €737 million correspond to futures transactions with the CITIC Group.
In addition, as part of its normal activity, the BBVA Group has entered into agreements and commitments of various types with shareholders of subsidiaries and associates, which have no material effects on the accompanying consolidated financial statements.
55.3 Transactions with members of the Board of Directors and the Management Committee
The information on the remuneration of the members of the BBVA Board of Directors and the Management Committee is included in Note 56.
As of December 31, 2011, there was no amount disposed of the loans granted by the Group’s credit institutions to the members of the Bank’s Board of Directors and, at that date, the loans granted by the Group’s credit institutions to the members of the Management Committee (excluding the executive directors), amounted to €6,540 thousand.
The loans granted by the Group’s credit institutions as of December 31, 2010 and 2009 to the members of the Board of Directors of the Bank amounted to€531 and€806 thousand, respectively, and, for the same periods, the loans granted by the Group’s credit institutions to members of the Management Committee (excluding the executive directors), amounted to €4,924 and€3,912 thousand, respectively.
The amount disposed of the loans granted as of December 31, 2011, 2010 and 2009 to parties related to the members of the Bank’s Board of Directors and Management Committee amounted to €20,593, €28,493 and €51,882 thousand, respectively.
As of December 31, 2011, no guarantees were granted to any member of the Board of Directors, and the amount of guarantees granted to members of the Bank’s Management Committee reached €9 thousand. As of December 31, 2010 and 2009, no guarantees, financial leases or commercial loans were granted to members of the Board of Directors or to the Bank’s Management Committee.
As of December 31, 2011, 2010 and 2009, the amount granted for guarantee, financial lease and commercial loan transactions arranged with parties related to the members of the Bank’s Board of Directors and Management Committee reached €10,825, €4,424 and €24,514 thousand, respectively.
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55.4 Transactions with other related parties
As of December 31, 2011, 2010 and 2009, the Group did not perform any transactions with other related parties that did not belong to the normal course of their business, that were not under market conditions or that were relevant for the consolidated equity, income or the entity and financial situation of the BBVA Group.
Remuneration of non-executive directors
The remuneration paid to non-executive directors who are members of the Board of Directors during 2011 is indicated below, broken down by type of remuneration:
Year 2011 Remuneration ofNon-Executive Directors
José Antonio Fernández Rivero (1)
Carlos Loring Martinez de Irujo
Jose Luis Palao García-Suelto (2)
Juan Pi Llorens (3)
Total (4)
Mr. José Antonio Fernández Rivero, apart from the amounts detailed in the table above, also received a total of € 652 thousand in early retirement benefit as a former director of BBVA.
Mr. José Luis Palao García-Suelto was appointed as director of BBVA on February 1st, 2011.
Mr. Juan Pi LLorens was appointed as director of BBVA on July 27, 2011.
Mr. Rafael Bermejo Blanco, who resigned as director on March 29, 2011, has received in the year 2011 the total amount of € 104 thousand as compensation for his membership to the Board of Directors, to the Risks Committee and as President of the Audit Committee.
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Remuneration of executive directors
The remuneration paid to executive directors of the Bank in 2011 is indicated below, broken down by type of remuneration:
Year 2011 Remuneration of Executive Directors
The figures relate to variable remuneration for 2010 paid in 2011.
In addition, the executive directors were paid remunerations in kind and in other forms in 2011 for a total amount of €32.5 thousand, of which €10.8 thousand correspond to the Chairman and CEO and €21.7 thousand pertain to the President and COO.
Remuneration of the members of the Management Committee (*)
The remuneration paid in 2011 to the members of BBVA’s Management Committee amounted to€9,359 thousand in fixed remuneration and €14,296 thousand in variable remuneration accrued in 2010 and paid in 2011.
This section includes relevant information on the members of the Management Committee who held this position on December 31, 2011, excluding executive directors.
New Annual Variable Remuneration System
BBVA’s Ordinary General Meeting of Shareholders held on March 11, 2011 approved a new variable share-based remuneration system for BBVA’s executive team, including the executive directors.
This new system is based on a specific incentive for the members of the Executive Team (the “Incentive”). It consists of the annual allocation, to each beneficiary, of a number of units that serve as the basis for determining the number of shares that, if applicable, will correspond to them in the settlement of the Incentive based on the level of compliance with three indicators established by the AGM: the course of Total Shareholder Return (TSR); the Group’s recurrent Economic Profit (EP); and the Group’s attributed net income.
The total number of units assigned in the Incentive for 2011 was 155,000 for the Chairman and CEO and 117,000 for the President and COO; and a total of 620,500 units were assigned to all remaining members of the Management Committee who held that position on December 31, 2011.
This Incentive, together with the ordinary variable remuneration in cash that corresponds to each executive, constitutes its annual variable remuneration (the “Annual Variable Remuneration”).
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The General Meeting held on March 11, 2011 likewise established a new settlement and payment system for the Annual Variable Remuneration applicable to the categories of employees whose professional activities may significantly affect the Bank’s risk profile or who perform control functions. This includes executive directors and the rest of the members of the Management Committee, and was adapted to the requirements established in Directive 76/2010, which was transposed to Spanish law by means of Royal Decree 771/2011 of 3 June 2011 (“Royal Decree 771/2011”).
Once the amount of cash and shares corresponding to the executive directors and remaining members of the Management Committee in the settlement of their Annual Variable Remuneration has been determined, the payment will be subject to the conditions set forth in the AGM’s agreement in 2011 such that:
Once 2011 was closed, the Annual Variable Remuneration of the executive directors for 2011 was determined, applying the aforementioned conditions agreed upon by the AGM in March 2011. It includes their ordinary variable remuneration and the Incentive for the Executive Team. Thus, in the first quarter of 2012, they will perceive the settlement of the Annual Variable Remuneration corresponding to 2011: €999,731 and 155,479 BBVA shares for the Chairman and CEO; and €635,865 euros and 98,890 BBVA shares in the case of the President and COO. In both cases, the shares will be unavailable for one year from the date they are provided, in line with the aforementioned terms.
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As of December 31, 2011, these amounts were recognized under the heading “Other liabilities – Accruals” of the consolidated balance sheet.
In the first quarter of 2011, the Multi-year Variable Share-based Remuneration Program for 2009-2010 was settled for the members of BBVA’s executive team, including the executive directors and other members of the Management Team. This had been approved by the AGM of March 13, 2009 and resulted in, after applying the conditions established initially, a multiplier coefficient of 0 for the units allocated. Thus, the Program was settled with no shares being awarded to its beneficiaries.
The Bank’s Annual General Meeting held on March 12, 2010 approved a Multi-Year Variable Share-based Remuneration Program for 2010/2011 designed for the members of BBVA’s executive team, including the executive directors and members of the Management Committee (hereinafter, the “2010-2011 Program”). The result is obtained by multiplying the number of units assigned at the start of the Program to each beneficiary by a coefficient, between 0 and 2, established based on the evolution of the Bank’s total shareholders return (TSR) in 2010-2011 as compared to the evolution of this same indicator in a group of 18 international reference banks.
The number of units allocated to the executive directors, in accordance with the agreement of the AGM, was 105,000 for the Chairman and CEO and 90,000 for the President and COO; and a total of 385,000 units were allocated for all remaining members of the Management Committee who held that position on December 31, 2011.
The aforementioned AGM established that the shares, if applicable, arising from the settlement of the Program be awarded to the beneficiaries, who could have those shares available to them as follows: (i) 40 percent of the shares received will be freely transferable by the beneficiaries at the moment they are received; (ii) 30 percent of the shares received will be transferable one year after the settlement date of the Program; and (iii) the remaining 30 percent will be transferable starting two years after the settlement date of the Program.
Once the 2010/2011 Program finalized on December 31, 2011, according to the conditions established initially, the determination of the TSR or BBVA and the 18 reference banks was made. BBVA held fourth place in the comparison table. Therefore, under the terms established by the AGM, a multiplier coefficient of 2 was applied to the units allocated to each beneficiary. Thus, in the settlement of the Program, 210,000 BBVA shares were awarded to the Chairman and CEO; 180,000 BBVA shares were awarded to the President and COO; and 770,000 BBVA shares were awarded to all other members of the Bank’s Management Committee.
Thus, this standard and the requirements established in the aforementioned Royal Decree 771/2011 must be applied to the 2010/2011 Program. Therefore, the AGM of the Bank set for March 16, 2012 will address the modification of the settlement and payment system of the 2010/2011 Program previously approved by the AGM to adapt it to the terms established to that effect in Royal Decree 771/2011.
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Scheme for remuneration for non-executive directors with deferred distribution of shares
BBVA has a remuneration system with deferred distribution of shares in place for its non-executive directors that was approved by the AGM held on March 18, 2006 and renewed for an additional 5-year period through an agreement by the AGM held on March 11, 2011.
This system consists in the annual allocation of a number of “theoretical shares” to the non-executive directors equivalent to 20% of the total remuneration received by each in the previous year. This is based on the average closing prices of the BBVA shares during the sixty trading sessions prior to the dates of the ordinary general meetings approving the annual financial statements for each year.
Scheme for Remuneration of Non-Executive Directors with DeferredDistribution of Shares
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(*) Additionally, were also assigned to Don Rafael Bermejo Blanco, who resigned as director as of March 29, 2011, 9,806 theoretical shares
Also, €99 thousand in insurance premiums were paid on behalf of non-executive directors who are members of the Board of Directors.
The provisions registered as of December 31, 2011 for pension commitments for the Management Committee members, excluding executive directors, amounted to€60,312 thousand. Of these,€8,832 thousand were charged against 2011 earnings.
There were no commitments as of December 31, 2011 for the payment of compensation to executive directors.
Pursuant to Article 229.2 of the Spanish Corporations Act, as of December 31, 2011, no member of BBVA’s Board of Directors had a direct or indirect ownership interest in companies engaging in an activity that is identical, similar or complementary to the corporate purpose of BBVA, except for Mr. José Luis Palao García-Suelto, who at that date, held a direct holding of 3,977 shares in Banco Santander, S.A. and 5,147 shares in Caixabank, S.A. In addition, no member of the Bank’s Board of Directors holds positions or functions in those companies.
Furthermore, it indicates that, as of December 31, 2011, individuals associated to the members of the Bank’s Board of Directors were holders of 54,008 shares of Banco Santander, S.A. and of 414 shares of Banco Español de Crédito, S.A. (Banesto) and 3 shares of Bankinter, S.A.
58.1. Environmental impact
Given the activities in which the BBVA Group companies engage, the Group has no environmental liabilities, expenses, assets, provisions or contingencies that could have a significant effect on its consolidated equity, financial situation and profits. Consequently, as of December 31, 2011, there is no item in the Group’s consolidated financial statements that requires disclosure in an environmental information report pursuant to the Ministry of Economy Order of October 8, 2001, and no specific disclosure of information on environmental matters is included in these statements.
58.2. Breakdown of agents of credit institutions
The list of BBVA agents as required by Article 22 of Royal Decree 1245/1995 of 14 July 1995, of the Ministry of Economy and Finance, is included in the Bank’s individual financial statements for 2011.
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58.3. Report on the activity of the Customer Care Service and the Customer Ombudsman
The report on the activity of the Customer Care Service and the Customer Ombudsman required pursuant to Article 17 of Ministry of Economy Order ECO/734/2004 of 11 March 2004 is included in the Management Report accompanying these accompanying consolidated annual financial statements.
58.4 CNMV information requirements
Dividends paid in the year
The table below presents the dividends per share paid in cash in 2011, 2010 and 2009 (cash basis accounting, regardless of the year in which they were accrued), but without including other shareholder remuneration, like the “Dividend Option”. See Note 4 for a complete analysis of all remuneration awarded to shareholders during 2011.
Dividends Paid (*) (“Dividend Option” notincluded)
Ordinary shares
Rest of shares
Total dividends paid in cash (*)
Dividends with charge to income
Dividends with charge to reserve or share premium
Dividends in kind
Only included dividends paid in cash each year (cash-flows criteria), regardless of the year there were accrued.
Earnings and ordinary income by business segment
The detail of the consolidated net income for the years 2011, 2010 and 2009 for each business segment is as follows:
Net Income attributed by Business Areas
Subtotal Business areas
Non-assigned income
Elimination of interim income (between segments)
Other gains (losses) (*)
Income tax and/or income from discontinued operations
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For the years 2011, 2010 and 2009 the detail of the BBVA Group’s ordinary income for each operating segment, which is made up of the “Interest and similar income”, “Dividend income”, “Fee and commission income”, “Net gains (losses) on financial assets and liabilities” and “Other operating income”, is as follows:
Ordinary Income by Business Areas
Adjustments and eliminations of ordinary income between segments
Total Ordinary Income BBVA Group
Issuances by market type
Changes in debt certificates (including bonds) and subordinated liabilities (see Note 23.3) in 2011, 2010 and 2009 by the type of market in which they were issued are as follows:
Debt Certificates and SubordinatedLiabilities 2011
Debt certificates issued in the European Union
With information brochure
Without information brochure
Other debt certificates issued outside the European Union
Debt Certificates and SubordinatedLiabilities 2010
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Debt Certificates and SubordinatedLiabilities 2009
Interest and income by geographical area
The breakdown of the balance of “Interest and Similar Income” in the accompanying consolidated income statements by geographical area is as follows:
Interest and Similar Income. Breakdown by Geographical Area
Domestic market
European Union
Rest of OECD
Average number of employees by gender
The breakdown of the average number of employees in the BBVA Group in 2011, 2010 and 2009, by gender, is as follows:
Average Number of Employees
Breakdown by Gender
Average Number of Employees BBVA Group
BBVA, S.A.
Spanish financial system reform: 02/2012 Royal Decree-law
After December 31, 2011, the Spanish’s Government has implemented a group of extraordinary measures that will affect the Spanish financial system. Among these measures, 2/2012 Royal Decree-law of 3 February, on the banking sector reform (the “Royal Decree”), was published in Spain’s State Official Gazette and entered into force on February 4, 2012. Among other requirements, the Royal Decree increases the coverage requirements for certain real estate assets on the balance sheets of credit institutions as at December 31, 2011. The BBVA Group consider that credit institutions will attempt to accelerate sales of real estate assets in Spain during 2012 in light of the Royal Decree, rather than comply with such increased coverage requirements, by reducing prices, which it is expected will result in a decline in overall real estate prices.
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The Group has estimated the possible impact, based on the portfolios as of December 31, 2011, which would have on the consolidated financial statements as of and for the year ended December 31, 2012, assuming the full extent of the expected decline in real estate prices occurs during 2012.
However, the actual impact on the consolidated financial statements of any decline in real estate prices resulting from the Royal Decree will be determined based on the Group’s internal model estimations, which are based on the most recent available estimates by independent appraisals, and which, among other criteria, take into account actual outcomes of similar property sales and conditions.
Regarding the issue of mandatory convertible subordinated bonds detailed in Note 23.4 (“Convertible Bonds”), the Bank has reported the opening of a voluntary conversion period at the option of holders of these Convertible Bonds.
The voluntary conversion period began on 23rd March 2012 and ended on 29th March 2012, both dates included. Holders of Convertible Bonds have been able to request conversion of their entire Convertible Bond holding, as partial conversion was not possible. The conversion price for voluntary conversion was 6.0470 euro. Likewise the conversion ratio was 16.537126.
During the voluntary conversion period orders have been received to convert 9,547,559 BBVA Subordinated Mandatory Convertible Bonds – December 2011 (the “Convertible Bonds”) for a total amount of 954,755,900, i.e. 27.84% of the total amount of the Convertible Bond issued. Consequently, 157,875,375 new ordinary BBVA shares have been issued, each with a nominal value of forty-nine euro-cents (€0.49), in order to attend this voluntary conversion of the Convertible Bonds.
Acquisition of UNNIM BANC
On March 7, 2012, the Management Commission of the Fund for Orderly Bank Restructuring (“Fondo de Restruturación Ordenada Bancaria” or “FROB” accepted BBVA’s offer to acquire Unnim Banc, S.A. (“Unnim”).The FROB, the Deposit Guarantee Fund of Credit Institutions (“Fondo de Garantía de Depósitos” or “FGD”) and BBVA have entered into a purchase agreement, by virtue of which BBVA will acquire 100% of the shares of Unnim for a purchase price of €1.
The closing of the purchase agreement and the “Protocol of Financial Measures” is subject to obtaining the relevant administrative authorizations and approvals, including the approval of the Bank of Spain, the Finance Secretary of State, the European Commission and the relevant competition authorities. Unimm’s assets as of December, 31, 2011 were €29 billion.
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Announcement 2012 “Dividend Option”
In execution of the 2012 “Dividend Option” scheme described under Note 4, on April 11, 2012, the Executive Committee of the Board of Directors executed the first free-of-charge capital increase in accordance with the terms approved by the ordinary General Shareholders Meeting held on March 16, 2002. This free of charge capital increase gives BBVA shareholders the option to receive one (1) newly-issued share of the Bank for each 47 shares of BBVA held by them or to receive a cash remuneration of €0.118 per share.
The closing for this free-of-charge capital increase is expected to take place on May 5, 2012. Therefore, as of the date of the preparation of these annual consolidated financial statements, there has been no change to the capital stock other than the increase resulting from the conversion of the mandatory convertible subordinated bonds referred to above.
Since January 1, 2012 until the preparation of these annual consolidated financial statements, no other events not mentioned in these financial statements have taken place.
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Appendices
Balance sheets as of December 31, 2011 and 2010 of BBVA, S.A.
INVESTMENTS
Group entities
Presented for comparison purposes only
A-1
Provisions for contingent exposures and commitments
A-2
STOCKHOLDERS’ EQUITY
Less: Unpaid and uncalled (-)
Less: Treasury stock (-)
Less: Dividends and remuneration (-)
Hedges of net investments in foreign operations
CONTINGENT EXPOSURES
A-3
Income Statements for the years ended
December 31, 2011 and 2010 of BBVA,S.A.
PROVISION (NET)
NET INCOME FOR THE YEAR
A-4
Statements of Recognized Income and Expenses for the years ended
December 31, 2011 and 2010 of BBVA, S.A.
Hedges of net investment in foreign operations
A-5
Statement of Changes in Equity for the years ended December 31, 2011 and 2010 of BBVA, S.A.
Rest of increase/reductions in total equity
A-6
A-7
Cash Flows Statements for the years ended December 31, 2011 and 2010 of BBVA, S.A.
Profit for the year
Amortization
Other financial assets at fair value through profit or loss
A-8
Treasury stock amortization
EFFECT OF EXCHANGE RATE CHANGES ON CASH OR CASH EQUIVALENTS (4)
COMPONENTS OF CASH AND EQUIVALENTS AT END OF THE YEAR
A-9
Company
Location
Activity
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA, S.A. (AFP PROVIDA)
ADMINISTRADORA DE FONDOS PARA EL RETIRO-BANCOMER,S.A DE C.V.
AFP GENESIS ADMINISTRADORA DE FONDOS Y FIDEICOMISOS, S.A.
AFP HORIZONTE, S.A.
AFP PREVISION BBV-ADM.DE FONDOS DE PENSIONES S.A.
AMERICAN FINANCE GROUP, INC.
ANIDA DESARROLLOS INMOBILIARIOS, S.L.
ANIDA GERMANIA IMMOBILIEN ONE, GMBH
ANIDA GRUPO INMOBILIARIO, S.L. (**)
ANIDA INMOBILIARIA, S.A. DE C.V.
ANIDA OPERACIONES SINGULARES, S.L. (***)
ANIDA PROYECTOS INMOBILIARIOS, S.A. DE C.V.
ANIDA SERVICIOS INMOBILIARIOS, S.A. DE C.V.
ANIDAPORT INVESTIMENTOS IMOBILIARIOS, UNIPESSOAL, LTDA
APLICA SOLUCIONES ARGENTINAS, S.A.
APLICA SOLUCIONES TECNOLOGICAS CHILE LIMITADA
APLICA TECNOLOGIA AVANZADA OPERADORA, S.A. DE C.V.
APLICA TECNOLOGIA AVANZADA SERVICIOS, S.A. DE C.V.
APLICA TECNOLOGIA AVANZADA, S.A. DE C.V.- ATA
ARIZONA FINANCIAL PRODUCTS, INC
AUTOMERCANTIL-COMERCIO E ALUGER DE VEICULOS AUTOM.,LDA
BAHIA SUR RESORT, S.C.
BANCO BILBAO VIZCAYA ARGENTARIA PUERTO RICO
BANCO BILBAO VIZCAYA ARGENTARIA URUGUAY, S.A.
BANCO CONTINENTAL, S.A. (1)
BANCO DE PROMOCION DE NEGOCIOS, S.A.
BANCO DEPOSITARIO BBVA, S.A.
BANCO INDUSTRIAL DE BILBAO, S.A.
BANCO OCCIDENTAL, S.A.
BANCO PROVINCIAL OVERSEAS N.V.(2)
BANCOMER FINANCIAL SERVICES INC.
BANCOMER FOREIGN EXCHANGE INC.
BANCOMER PAYMENT SERVICES INC.
BANCOMER TRANSFER SERVICES, INC.
BBV AMERICA, S.L.
Information on foreign companies at exchange rate on December 31, 2011
This company has an equity loan from BBVA, S.A.
This company has an equity loan from ANIDA GRUPO INMOBILIARIO, S.L. In addition, the company has recognized impairment losses arising in its annual accounts due to property, real estate and stocks, which according to Royal Decree-Law 5/2010 of March 31, are not counted for purposes of Article 363 of the Companies Act Capital.
The percentage of voting rights is the result of the agreements entered into with shareholders that enable the control of the entity. The ownership percentage is 46.1%.
The percentage of voting rights is the result of the agreements entered into with shareholders that enable the control of the entity. The ownership percentage is 48.0%.
A-10
BBVA & PARTNERS ALTERNATIVE INVESTMENT A.V., S.A.
BBVA ASESORIAS FINANCIERAS, S.A.
BBVA ASSET MANAGEMENT (IRELAND) LIMITED
BBVA ASSET MANAGEMENT ADMINISTRADORA GENERAL DE FONDOS S.A.
BBVA ASSET MANAGEMENT, S.A. SOCIEDAD FIDUCIARIA (BBVA FIDUCIARIA)
BBVA ASSET MANAGEMENT, S.A., SGIIC
BBVA AUTORENTING SPA
BBVA BANCO DE FINANCIACION S.A.
BBVA BANCOMER GESTION, S.A. DE C.V.
BBVA BANCOMER OPERADORA, S.A. DE C.V.
BBVA BANCOMER SERVICIOS ADMINISTRATIVOS, S.A. DE C.V.
BBVA BANCOMER USA, INC.
BBVA BANCOMER, S.A., INSTITUCION DE BANCA MÚLTIPLE, GRUPO FINANCIERO BBVA BANCOMER
BBVA BRASIL BANCO DE INVESTIMENTO, S.A.
BBVA BROKER, CORREDURIA DE SEGUROS Y REASEGUROS, S.A.
BBVA CAPITAL FINANCE, S.A.
BBVA CARTERA DE INVERSIONES, SICAV, S.A.
BBVA COMERCIALIZADORA LTDA.
BBVA COMPASS BANCSHARES, INC.
BBVA COMPASS CONSULTING & BENEFITS, INC
BBVA COMPASS INSURANCE AGENCY, INC
BBVA COMPASS INVESTMENT SOLUTIONS, INC
BBVA CONSOLIDAR SEGUROS, S.A.
BBVA CONSULTING (BEIJING) LIMITED
BBVA CONSULTORIA, S.A.
BBVA CORREDORA TECNICA DE SEGUROS LIMITADA
BBVA CORREDORES DE BOLSA LIMITADA
BBVA DINERO EXPRESS, S.A.U
BBVA DISTRIBUIDORA DE SEGUROS S.R.L.
BBVA FACTORING LIMITADA (CHILE)
BBVA FINANCE (UK), LTD.
BBVA FINANCE SPA.
BBVA FINANCIAMIENTO AUTOMOTRIZ, S.A.
BBVA FINANZIA, S.p.A
BBVA FRANCES ASSET MANAGEMENT S.A. SOCIEDAD GERENTE DE FONDOS COMUNES DE INVERSIÓN.
BBVA FRANCES VALORES SOCIEDAD DE BOLSA, S.A.
BBVA FUNDOS, S.Gestora Fundos Pensoes, S.A.
A-11
BBVA GEST, S.G.DE FUNDOS DE INVESTIMENTO MOBILIARIO, S.A.
BBVA GLOBAL FINANCE LTD.
BBVA GLOBAL MARKETS B.V.
BBVA HORIZONTE PENSIONES Y CESANTIAS, S.A.
BBVA INMOBILIARIA E INVERSIONES, S.A.
BBVA INSTITUIÇAO FINANCEIRA DE CREDITO, S.A.
BBVA INTERNATIONAL LIMITED
BBVA INTERNATIONAL PREFERRED, S.A.U.
BBVA INVERSIONES CHILE, S.A.
BBVA IRELAND PLC
BBVA LEASIMO – SOCIEDADE DE LOCAÇAO FINANCEIRA, S.A.
BBVA LUXINVEST, S.A.
BBVA MEDIACION OPERADOR DE BANCA-SEGUROS VINCULADO, S.A.
BBVA NOMINEES LIMITED
BBVA PARTICIPACIONES MEJICANAS, S.L.
BBVA PATRIMONIOS GESTORA SGIIC, S.A.
BBVA PENSIONES, SA, ENTIDAD GESTORA DE FONDOS DE PENSIONES
BBVA PLANIFICACION PATRIMONIAL, S.L.
BBVA PROPIEDAD, S.A.
BBVA RE LIMITED
BBVA RENTING, S.A.
BBVA RENTING, SPA
BBVA SECURITIES INC.
BBVA SECURITIES OF PUERTO RICO, INC.
BBVA SEGUROS COLOMBIA, S.A.
BBVA SEGUROS DE VIDA COLOMBIA, S.A.
BBVA SEGUROS DE VIDA, S.A.
BBVA SEGUROS INC.
BBVA SEGUROS, S.A., DE SEGUROS Y REASEGUROS
BBVA SENIOR FINANCE, S.A.U.
BBVA SERVICIOS CORPORATIVOS LIMITADA
BBVA SERVICIOS, S.A.
BBVA SOCIEDAD DE LEASING INMOBILIARIO, S.A.
BBVA SUBORDINATED CAPITAL S.A.U.
BBVA TRADE, S.A.
BBVA U.S. SENIOR S.A.U.
BBVA USA BANCSHARES, INC
A-12
BBVA VALORES COLOMBIA, S.A. COMISIONISTA DE BOLSA
BBVA WEALTH SOLUTIONS, INC.
BBVAPR HOLDING CORPORATION
BILBAO VIZCAYA HOLDING, S.A.
BLUE INDICO INVESTMENTS, S.L.
C B TRANSPORT ,INC.
CAPITAL INVESTMENT COUNSEL, INC.
CARTERA E INVERSIONES S.A., CIA DE
CASA DE BOLSA BBVA BANCOMER , S.A. DE C.V.
CASA DE CAMBIO MULTIDIVISAS, S.A. DE C.V.
CIA. GLOBAL DE MANDATOS Y REPRESENTACIONES, S.A.
CIDESSA DOS, S.L.
CIDESSA UNO, S.L.
CIERVANA, S.L.
COMERCIALIZADORA CORPORATIVA SAC (1)
COMERCIALIZADORA DE SERVICIOS FINANCIEROS, S.A.
COMPASS ASSET ACCEPTANCE COMPANY, LLC
COMPASS AUTO RECEIVABLES CORPORATION
COMPASS CAPITAL MARKETS, INC.
COMPASS CUSTODIAL SERVICES, INC.
COMPASS FINANCIAL CORPORATION
COMPASS GP, INC.
COMPASS INVESTMENTS, INC.
COMPASS LIMITED PARTNER, INC.
COMPASS LOAN HOLDINGS TRS, INC.
COMPASS MORTGAGE CORPORATION
COMPASS MORTGAGE FINANCING, INC.
COMPASS MULTISTATE SERVICES CORPORATION
COMPASS SOUTHWEST, LP
COMPASS TEXAS ACQUISITION CORPORATION
COMPASS TEXAS MORTGAGE FINANCING, INC
COMPASS TRUST II
COMPASS WEALTH MANAGERS COMPANY
COMPAÑIA CHILENA DE INVERSIONES, S.L.
CONSOLIDAR A.F.J.P., S.A.
CONSOLIDAR ASEGURADORA DE RIESGOS DEL TRABAJO, S.A.
CONTENTS AREA, S.L.
The percentage of voting rights is the result of the agreements entered into with shareholders that enable the control of the entity. The ownership percentage is 50.0%.
A-13
CONTINENTAL BOLSA, SDAD. AGENTE DE BOLSA, S.A.(1)
CONTINENTAL DPR FINANCE COMPANY (1)
CONTINENTAL S.A. SOCIEDAD ADMINISTRADORA DE FONDOS (1)
CONTINENTAL SOCIEDAD TITULIZADORA, S.A.(1)
CONTRATACION DE PERSONAL, S.A. DE C.V.
COPROMED S.A. DE C.V.
CORPORACION GENERAL FINANCIERA, S.A.
DESARROLLADORA Y VENDEDORA DE CASAS, S.A
DESARROLLO URBANISTICO DE CHAMARTIN, S.A.
DESITEL TECNOLOGIA Y SISTEMAS, S.A. DE C.V.
ECASA, S.A.
ECONTA GESTION INTEGRAL, S.L.
EL ENCINAR METROPOLITANO, S.A.
EL MILANILLO, S.A.
EL OASIS DE LAS RAMBLAS, S.L.
EMPRENDIMIENTOS DE VALOR S.A.
ENTRE2 SERVICIOS FINANCIEROS, E.F.C., S.A.
ESPANHOLA COMERCIAL E SERVIÇOS, LTDA.
ESTACION DE AUTOBUSES CHAMARTIN, S.A.
EUROPEA DE TITULIZACION, S.A., S.G.F.T.
FACILEASING EQUIPMENT, S.A. DE C.V.
FACILEASING S.A. DE C.V.
FIDEICOMISO 28991-8 TRADING EN LOS MCADOS FINANCIEROS
FIDEICOMISO F/29763-0 SOCIO LIQUIDADOR DE OPERACIONES FINANCIERAS DERIVADAS CUENTA PROPIA
FIDEICOMISO F/29764-8 SOCIO LIQUIDADOR DE OPERACIONES FINANCIERAS DERIVADAS CUENTA TERCEROS
FIDEICOMISO HARES BBVA BANCOMER F/ 47997-2
FIDEICOMISO Nº 711, EN BANCO INVEX, S.A.,INSTITUCION DE BANCA MULTIPLE, INVEX GRUPO FINANCIERO, FIDUCIARIO (FIDEIC. INVEX 1ª EMISION)
FIDEICOMISO Nº 752, EN BANCO INVEX, S.A.,INSTITUCION DE BANCA MULTIPLE, INVEX GRUPO FINANCIERO, FIDUCIARIO (FIDEIC. INVEX 2ª EMISION)
FIDEICOMISO Nº 781, EN BANCO INVEX, S.A.,INSTITUCION DE BANCA MULTIPLE, INVEX GRUPO FINANCIERO, FIDUCIARIO (FIDEIC. INVEX 3ª EMISION)
FIDEICOMISO Nº 847, EN BANCO INVEX, S.A.,INSTITUCION DE BANCA MULTIPLE, INVEX GRUPO FINANCIERO, FIDUCIARIO (FIDEIC. INVEX 4ª EMISION)
FIDEICOMISO Nº.402900-5 ADMINISTRACION DE INMUEBLES
FINANCEIRA DO COMERCIO EXTERIOR S.A.R.
FINANCIERA AYUDAMOS S.A. DE C.V., SOFOMER
FINANZIA AUTORENTING, S.A.
FORUM COMERCIALIZADORA DEL PERU, S.A.
FORUM DISTRIBUIDORA DEL PERU, S.A.
FORUM DISTRIBUIDORA, S.A.
FORUM SERVICIOS FINANCIEROS, S.A.
FUTURO FAMILIAR, S.A. DE C.V.
A-14
GESTION DE PREVISION Y PENSIONES, S.A.
GESTION Y ADMINISTRACION DE RECIBOS, S.A.
GOBERNALIA GLOBAL NET, S.A.
GRAN JORGE JUAN, S.A.
GRANFIDUCIARIA
GRUPO FINANCIERO BBVA BANCOMER, S.A. DE C.V.
GRUPO PROFESIONAL PLANEACION Y PROYECTOS, S.A. DE C.V.
GUARANTY BUSINESS CREDIT CORPORATION
GUARANTY PLUS HOLDING COMPANY
GUARANTY PLUS PROPERTIES LLC-2
GUARANTY PLUS PROPERTIES, INC-1
HIPOTECARIA NACIONAL MEXICANA INCORPORATED
HIPOTECARIA NACIONAL, S.A. DE C.V.
HOLDING CONTINENTAL, S.A.
HOMEOWNERS LOAN CORPORATION
HUMAN RESOURCES PROVIDER, INC
HUMAN RESOURCES SUPPORT, INC
IBERNEGOCIO DE TRADE, S.L.
INGENIERIA EMPRESARIAL MULTIBA, S.A. DE C.V.
INMUEBLES Y RECUPERACIONES CONTINENTAL S.A (1)
INVERAHORRO, S.L. (**)
INVERSIONES ALDAMA, C.A.
INVERSIONES BANPRO INTERNATIONAL INC. N.V.
INVERSIONES BAPROBA, C.A.
INVERSIONES P.H.R.4, C.A.
INVERSORA OTAR, S.A.
INVESCO MANAGEMENT Nº 1, S.A.
INVESCO MANAGEMENT Nº 2, S.A.
LIQUIDITY ADVISORS, L.P
MISAPRE, S.A. DE C.V.
MULTIASISTENCIA OPERADORA S.A. DE C.V.
MULTIASISTENCIA SERVICIOS S.A. DE C.V.
MULTIASISTENCIA, S.A. DE C.V.
OPCION VOLCAN, S.A.
OPPLUS OPERACIONES Y SERVICIOS, S.A.
OPPLUS S.A.C
PARTICIPACIONES ARENAL, S.L.
PECRI INVERSION S.A
A-15
NetCarryingAmount
PHOENIX LOAN HOLDINGS, INC.
PI HOLDINGS NO. 1, INC.
PI HOLDINGS NO. 3, INC.
PI HOLDINGS NO. 4, INC.
PORT ARTHUR ABSTRACT & TITLE COMPANY
PREMEXSA, S.A. DE C.V.
PREVENTIS, S.A.
PRO-SALUD, C.A.
PROMOCION EMPRESARIAL XX, S.A.
PROMOTORA DE RECURSOS AGRARIOS, S.A.
PROVIDA INTERNACIONAL, S.A.
PROVINCIAL DE VALORES CASA DE BOLSA, C.A.
PROVINCIAL SDAD.ADMIN.DE ENTIDADES DE INV.COLECTIVA, C.A.
PROVIVIENDA ENTIDAD RECAUDADORA Y ADMIN.DE APORTES, S.A.
PROXIMA ALFA INVESTMENTS (UK) LLP
PROXIMA ALFA INVESTMENTS (USA) LLC
PROXIMA ALFA INVESTMENTS HOLDINGS (USA) II INC.
PROXIMA ALFA INVESTMENTS HOLDINGS (USA) INC.
PROXIMA ALFA SERVICES LTD.
RENTRUCKS, ALQUILER Y SERVICIOS DE TRANSPORTE, S.A.
RESIDENCIAL CUMBRES DE SANTA FE, S.A. DE C.V.
RIVER OAKS BANK BUILDING, INC.
RIVER OAKS TRUST CORPORATION
RIVERWAY HOLDINGS CAPITAL TRUST I
RWHC, INC
SCALDIS FINANCE, S.A.
SEGUROS PROVINCIAL, C.A.
SERVICIOS CORPORATIVOS BANCOMER, S.A. DE C.V.
SERVICIOS CORPORATIVOS DE SEGUROS, S.A. DE C.V.
SERVICIOS EXTERNOS DE APOYO EMPRESARIAL, S.A DE C.V.
SERVICIOS TECNOLOGICOS SINGULARES, S.A.
SMARTSPREAD LIMITED (UK)
SOCIEDAD DE ESTUDIOS Y ANALISIS FINANCIERO.,S.A.
SOCIEDAD GESTORA DEL FONDO PUBLICO DE REGULACION DEL MERCADO HIPOTECARIO, S.A.
SOCIETE INMOBILIERE BBV D’ILBARRIZ
SOUTHEAST TEXAS TITLE COMPANY
SPORT CLUB 18, S.A.
STATE NATIONAL CAPITAL TRUST I
A-16
STATE NATIONAL STATUTORY TRUST II
TEXAS LOAN SERVICES, LP.
TEXAS REGIONAL STATUTORY TRUST I
TEXASBANC CAPITAL TRUST I
TMF HOLDING INC.
TRAINER PRO GESTION DE ACTIVIDADES, S.A.
TRANSITORY CO
TUCSON LOAN HOLDINGS, INC.
TWOENC, INC
UNICOM TELECOMUNICACIONES S.DE R.L. DE C.V.
UNIDAD DE AVALUOS MEXICO, S.A. DE CV
UNITARIA GESTION DE PATRIMONIOS INMOBILIARIOS
UNIVERSALIDAD “E5”
UNIVERSALIDAD TIPS PESOS E-9
URBANIZADORA SANT LLORENC, S.A.
VALANZA CAPITAL RIESGO S.G.E.C.R. S.A. UNIPERSONAL
VIRTUAL DOC, S.L.
VISACOM, S.A. DE C.V.
A-17
ADMINISTRADORA DE SOLUCIONES INTEGRALES, S.A. (ASI,S.A.)
ALTURA MARKETS, SOCIEDAD DE VALORES, S.A.
DOMENIA CREDIT IFN SA
G NETHERLANDS BV
GARANTI BANK MOSCOW
GARANTI BANK SA
GARANTI BILISIM TEKNOLOJISI VE TIC. TAS
GARANTI EMEKLILIK VE HAYAT AS
GARANTI FACTORING HIZMETLERI AS
GARANTI FINANSAL KIRALAMA A.S.
GARANTI HIZMET YONETIMI A.S
GARANTI HOLDING BV
GARANTI KONUT FINANSMANI DANISMANLIK HIZMETLERI AS (GARANTI MORTGAGE)
GARANTI ODEME SISTEMLERI A.S.(GOSAS)
GARANTI PORTFOY YONETIMI AS
GARANTI TEKNOLOJINET ILETISIM HIZ. VE TIC. A.S. (GARANTI TEKNOLOJINET)
GARANTI YATIRIM MENKUL KIYMETLER AS
GARANTIBANK INTERNATIONAL NV
GOLDEN CLOVER STICHTING CUSTODY
INVERSIONES PLATCO, C.A.
MOTORACTIVE IFN SA
PSA FINANCE ARGENTINA COMPAÑIA FINANCIERA, S.A.
RALFI IFN SA
SAFEKEEPING CUSTODY COMPANY B.V.
STICHTING SAFEKEEPING
STICHTING UNITED CUSTODIAN
TURKIYE GARANTI BANKASI A.S
A-18
(Including the most significant entities, jointly representing 98% of all investment in this collective)
ADMINISTRADORA DE FONDOS DE CESANTIA DE CHILE, S.A.
ADQUIRA ESPAÑA, S.A.
ALMAGRARIO, S.A.
ALTITUDE SOFTWARE SGPS, S.A.(*)
AUREA, S.A. (CUBA)
BBVA ELCANO EMPRESARIAL II, S.C.R., S.A.
BBVA ELCANO EMPRESARIAL, S.C.R., S.A.
CAMARATE GOLF, S.A.(*)
CHINA CITIC BANK LIMITED CNCB
CITIC INTERNATIONAL FINANCIAL HOLDINGS LIMITED CIFH
COMPAÑIA ESPAÑOLA DE FINANCIACION DEL DESARROLLO S.A.
COMPAÑIA MEXICANA DE PROCESAMIENTO, S.A. DE C.V.
CORPORACION IBV PARTICIPACIONES EMPRESARIALES, S.A.(*)
FERROMOVIL 3000, S.L.(*)
FERROMOVIL 9000, S.L.(*)
I+D MEXICO, S.A. DE C.V.(*)
IMOBILIARIA DUQUE D’AVILA, S.A. (*)
LAS PEDRAZAS GOLF, S.L.(*)
OCCIDENTAL HOTELES MANAGEMENT, S.L.(*)
ROMBO COMPAÑIA FINANCIERA, S.A.
SERVICIOS DE ADMINISTRACION PREVISIONAL, S.A.
SERVICIOS ELECTRONICOS GLOBALES, S.A. DE C.V.
SERVICIOS ON LINE PARA USUARIOS MULTIPLES, S.A. (SOLIUM)(*)
SERVIRED SOCIEDAD ESPAÑOLA DE MEDIOS DE PAGO, S.A.
TELEFONICA FACTORING ESPAÑA, S.A.
TUBOS REUNIDOS, S.A.
VITAMEDICA S.A DE C.V.(*)
OTHER COMPANIES
Jointly controlled companies accounted for using the equity method
Data relating to the latest financial statements approved at the date of preparation BBVA Group consolidated financial statements. For purposes of preparing the Group consolidated financial statements, the most recent available financial statements of each company are used, regardless of whether such financial statements are audited. Information on foreign companies at exchange rate on reference date
Consolidated Data
The most recent audited financial statements are for the year ended December 31, 2010
The most recent audited financial statements are for the year ended December 31, 2009
A-19
Acquisitions or Increases of Interest Ownership in Consolidated Subsidiaries and Jointly Controlled Companies Accounted for Under the Proportionate Method
CREDIT URUGUAY BANCO, S.A.
LEASEMART HOLDING BV
GARANTI ODEME SISTEMLERI A.S.(GÖSAS)
GARANTI BROKER DE ASIGURARE SRL
BBVA & PARTNERS ALTERNATIVE INVESTMENT AV SA
BBVA BANCO FRANCES S.A.
EL ENCINAR METROPOLITANO
A-20
Disposals or Reduction of Interest Ownership in Consolidated Subsidiaries and Jointly Controlled Companies Accounted for Under the Proportionate Method
BCL INTERNATIONAL FINANCE. LTD.
PROMOTORA RESIDENCIAL GRAN EUROPA, S.L.
CREDIT URUGUAY BANCO, S.A.(1)
CONSOLIDAR CIA. DE SEGUROS DE RETIRO, S.A.
JARDINES DE SARRIENA, S.L.
FIDEICOMISO MIRASIERRA BBVA-BANCOMER Nº F/70413-0
FINANZIA, BANCO DE CREDITO, S.A.(2)
CONSOLIDAR COMERCIALIZADORA, S.A.(3)
INMOBILIARIA BILBAO, S.A.(4)
MEDITERRANIA DE PROMOCIONS I GESTIONS INMOBILIARIES, S.A.(4)
LEASEMART HOLDING BV(5)
PROMOTORA METROVACESA, S.L.(6)
ANIDA DESARROLLOS SINGULARES, S.L.(6)
ANIDA INMUEBLES ESPAÑA Y PORTUGAL, S.L.(6)
CORPORACION DE ALIMENTACION Y BEBIDAS, S.A.(7)
BILBAO VIZCAYA AMERICA B.V.(8)
DINERO EXPRESS SERVICIOS GLOBALES, S.A.
FIDEICOMISO BBVA BANCOMER SERVICIOS Nº F/47433-8, S.A.
Merger company: BBVA URUGUAY,SA
Merger company: BBVA,SA
Merger company: BBVA BANCO FRANCES,SA
Merger company: CIDESSA DOS,SA
Merger company: GARANTI HOLDING BV
Merger company: ANIDA OPERACIONES SIGULARES, S.L.
Merger company: BANCO INDUSTRIAL DE BILBAO, S.A.
Merger company: BBV AMERICA, S.L.
A-21
Business Combinations and Other Acquisitions or Increases of Interest Ownership in Associates and Jointly Controlled Companies Accounted for Under the Equity Method
CABAL URUGUAY, S.A.
REDBANC, S.A.(URUGUAY)
ALTITUDE SOFTWARE SGPS, S.A.
SISTARBANC S.R.L.
REDSYS SERVICIOS DE PROCESAMIENTO, S.L.
MOTORACTIVE MULTISERVICES SRL
GARANTI FILO YONETIM HIZMETLERI A.S.
GARANTI KULTUR AS
TRIFOI REAL ESTATE SRL
SOLIUM OPERADORA, S.A. DE C.V.
PROMOTORA METROVACESA
Disposal or Reduction of Interest Ownership in Associates and Jointly Controlled Companies Accounted for Under the Equity Method
HESTENAR, S.L.
HESTERALIA MALAGA, S.L.
BLUE VISTA PLATAFORMA DE EMISION EN NUEVOS MEDIOS, S.L.
A-22
Changes in other Companies quoted recognize as Available-for-sale
Type of Transaction
REPSOL YPF, S.A.(*)
ACS ACTIVIDADES DE CONSTRUCCION Y SERVICIOS, S.A.(*)
SOL MELIA, S.A.(*)
METROVACESA, S.A (*)
Notifications realized
A-23
BANCO BILBAO VIZCAYA ARGENTARIACHILE, S.A.
DESARROLLO URBANISTICO DECHAMARTIN, S.A.
INVERSIONES BANPRO INTERNATIONALINC. N.V.
A-24
Securitization Fund
BBVA AUTOS I FTA
BBVA-3 FTPYME FTA
BBVA AUTOS 2 FTA
BBVA HIPOTECARIO 3 FTA
BBVA-4 PYME FTA
BBVA CONSUMO 1 FTA
BBVA-5 FTPYME FTA
BCL MUNICIPIOS I FTA
2 PS RBS (ex ABN)
BBVA CONSUMO 2 FTA
BBVA CONSUMO 3 FTA
BBVA CONSUMO 4 FTA
BBVA CONSUMO 5 FTA
BBVA UNIVERSALIDAD E10
BBVA UNIVERSALIDAD E11
BBVA UNIVERSALIDAD E12
BBVA UNIVERSALIDAD E5
BBVA UNIVERSALIDAD E9
BBVA EMPRESAS 1 FTA
BBVA EMPRESAS 2 FTA
BBVA EMPRESAS 3 FTA
BBVA EMPRESAS 4 FTA
BBVA EMPRESAS 5 FTA
BBVA EMPRESAS 6 FTA
BACOMCB 07
BACOMCB 08
BACOMCB 08U
BACOMCB 08-2
BACOMCB 09
BBVA-FINANZIA AUTOS 1 FTA
GAT FTGENCAT 2005 FTA
BBVA RMBS 1 FTA
BBVA RMBS 2 FTA
BBVA RMBS 3 FTA
BBVA RMBS 4 FTA
BBVA RMBS 5 FTA
BBVA RMBS 6 FTA
BBVA RMBS 7 FTA
BBVA RMBS 9 FTA
BBVA RMBS 10 FTA
BBVA LEASING 1 FTA
PEP80040F110
BBVA-6 FTPYME FTA
BBVA-7 FTGENCAT FTA
BBVA-8 FTPYME FTA
BBVA RMBS 8 FTA
2 PS INTERAMERICANA
FannieMae- Lender No. 227300000
FANNIE MAE – LENDER No. 227300027
A-25
Outstanding as of December 31, 2011 of subordinated issues
Issuer Entity and Issued Date
Issues in Euros
BBVA
July-96
November-03
October-04
February-07
March-08
July-08
September-09
BBVA GLOBAL FINANCE, LTD. (*)
July-99
February-00
October-01
November-01
December-01
BBVA SUBORDINATED CAPITAL, S.A.U. (*)
May-05
October-05
October-06
April-07
May-08
BBVA BANCOMER, S.A. de C.V.
May-07
ALTURA MARKETS A.V., S.A.
November-07
TURKIYE GARANTIA BANKASI, A.S.
February-09
Different issues
Total issued in Euros
As of March 23, 2010 issues of BBVA Capital Funding, Ltd. have been assumed by BBVA Global Finance Ltd.
The issues of BBVA Subordinated Capital, S.A.U. and BBVA Global Finance, LTD. are guaranteed (secondary liability) by the Bank.
A-26
Outsanding as of December 31, 2011 of subordinated issues
Issues in foreign currency
BBVA PUERTO RICO, S.A.
September-04
September-06
December-95
October-95
BANCO BILBAO VIZCAYA ARGENTARIA, CHILE
Various issues
July-05
April-10
March-11
October-08
December-08
June-09
BBVA SUBORDINATED CAPITAL, S.A.U.
March-06
March-07
RIVERWAY HOLDING CAPITAL TRUST I
March-01
February-04
A-27
July-03
March-04
July-04
March-05
September-07
August-06
September-11
Various
December-06
February-08
June-08
November-08
October-10
June-07
September-08
TURKIYE GARANTI BANKASI, A.S.
Feb-07
Total issues in foreign currencies (Millions of Euros)
A-28
Outstanding as of December 31, 2011 of preferred issues
BBVA International, Ltd.
December-02
BBVA Capital Finance, S.A.U.
December-03
December-04
BBVA International Preferred, S.A.U.
September-05
July-07
October-09
Banco Provincial, S.A. – Banco Universal
October-07
Phoenix Loan Holdings Inc.
November-00
A-29
Assets -
Investments in entities accounted for using the equity method
Liabilities-
Financial liabilities at amortised cost
A-30
a) Policies and strategies established by the Group to deal with risks related to the developer and real-estate sector
BBVA has teams specializing in the management of the Real Estate Sector risk, given its economic importance and specific technical component. This specialization is not only in the Risk-Acceptance teams, but throughout the handling, commercial, problematic management and legal aspects, and includes the research department (BBVA Research), which helps determine the medium/long-term vision needed to manage this portfolio. Specialization has been increased and the management teams in the areas of recovery and the Real Estate Unit itself have been reinforced.
The portfolio management policies, established to address the risks related to the developer and real-estate sector, aims to accomplish, among others, the following objectives: to avoid concentration in terms of customers, products and regions; to estimate the risk profile for the portfolio; and to anticipate possible worsening of the portfolio.
Specific policies for analysis and admission of new developer risk transactions
In the analysis of new operations, the assessment of the commercial operation in terms of the economic and financial viability of the project has been once of the constant points that have helped ensure the success and transformation of construction land operations for our customers’ developments.
As regards the participation of the Risk Acceptance teams, they have a direct link and participate in the committees of areas such as Recoveries and the Real Estate Unit. This guarantees coordination and exchange of information in all the processes.
The following strategies have been implemented with customers: avoidance of large corporate transactions, which had already reduced their share in the years of greatest market growth; non-participation in the second-home market; commitment to public housing financing; and participation in land operations with a high level of urban development security, giving priority to land open to urban development.
Risk monitoring policies
The base information for analyzing the real estate portfolios is updated monthly. The tools used include the so-called “watch-list”, which is updated monthly with the progress of each client under watch, and the different strategic plans for management of special groups. There are plans that involve an intensification of the review of the portfolio for financing land, while, in the case of ongoing promotions, they are classified for monitoring purposes based on the rate of progress of the projects.
These actions have enabled the Bank to anticipate possible impairment situations, by always keeping an eye on BBVA’s position with each customer (whether or not as first creditor). In this regard, key aspects include management of the risk policy to be followed with each customer, contract review, deadline extension, improved collateral, rate review (repricing) and asset purchase.
Proper management of the relationship with each customer requires knowledge of various aspects such as the identification of the source of payment difficulties, an analysis of the company’s future viability, the updating of the information on the debtor and the guarantors (their current situation and business course, economic-financial information, debt analysis and generation of funds), and the updating of the appraisal of the assets offered as collateral.
BBVA has a classification of debtors in accordance with legislation in force in each country, usually categorizing each one’s level of difficulty for each risk.
A-31
Based on the information above, a decision is made whether to use the refinancing tool, whose objective is to adjust the structure of the maturity of the debt to the generation of funds and the customer’s payment capacity.
As for the policies relating to risk refinancing with the developer and real-estate sector, they are the same as the general policies used for all of the Group’s risks. In the developer and real estate sector, they are based on clear solvency and viability criteria for projects, with demanding terms for guarantees and legal compliance. The policy on refinancing uses outstanding risk rather than nonperforming assets, with a refinancing tool that standardizes criteria and values up to a total of 19 variables when considering any refinancing operation.
In the case of refinancing, the tools used for enhancing the Bank’s position are: the search for new intervening parties with proven solvency and initial payment to reduce the principal debt or outstanding interest; the improvement of the debt bond in order to facilitate the procedure in the event of default; the provision of new or additional collateral; and making refinancing viable with new conditions (period, rate and repayments), adapted to a credible and sufficiently verified business plan.
Policies applied in the management of real estate assets in Spain
The policy applied for managing these assets depends on the type of real-estate asset, as detailed below.
In the case of completed homes, the final aim is the sale of these homes to private individuals, thus diluting the risk and beginning a new business cycle. Here, the strategy has been to help subrogation (the default rate in this channel of business is notably lower than in any other channel of residential mortgages) and to support our customers’ sales directly, using BBVA’s own channel (BBVA Services and our branches), creating incentives for sale and including sale orders for BBVA that set out sale prices which are notably lower than initial ones. In exceptional case we have even accepted partial haircuts, with the aim of making the sale easier.
In the case of ongoing construction work, our strategy has been to help and promote the completion of the works in order to transfer the investment to completed homes. The whole developer Works in Progress portfolio has been reviewed and classified into different stages with the aim of using different tools to support the strategy. This includes the use of developer accounts-payable financing as a form of payment control, the use of project monitoring supported by the Real Estate Unit itself, and the management of direct suppliers for the works as a complement to the developer’s own management.
With respect to land, our presence at advanced stages in land development, where the vast majority of our risk is urban land, simplifies our management. Urban management and liquidity control to tackle urban planning costs are also subject to special monitoring.
b) Quantitative information on activities in the real-estate market in Spain
As of December 31, 2011 and 2010, exposure (excluding undisbursed amounts) to customers of the construction or real estate industry in Spain (in accordance with the official Spanish industry classification) stood at €25,287 million and €31,708 million, respectively. Of that amount, risk from loans granted to customers in Spain for the development of real estate and housing accounted for €14,158 million and €16,608 million, representing 8.1% and 8.9% of loans and advances to customers of the balance of business in Spain (excluding the government and other public agencies) and 2% and 3% of the total assets of the Consolidated Group.
A-32
Lending for real estate development according to the purpose of the loans as of December 31, 2011 and 2010 is shown below:
Financing allocated to construction and real estate development and itscoverage
Loans recorded by the Group’s credit institutions (Business in Spain)
Of which: Impaired assets
Of which: Potential problem assets
Memorandum item:
Write-offs
Consolidated Group Data (carrying amount)
Total loans and advances to customers, excluding the Public Sector (Business in Spain)
Total consolidated assets (total business)
Impairment losses determined collectively (total business)
As of December 31, 2011, 29% of the nonperforming assets in this sector are up-to-date on payments, but were classified as non-performing in accordance with the provisions of Appendix IX of Circular 4/2004 of the Bank of Spain. Furthermore, substandard risk amounted to 14.5% of total developer risk.
The drawn over the guarantee value shown in the tables above corresponds to the difference between the gross amount of each loan and the value of the real rights that, if applicable, were received as security, calculated according to Bank of Spain Circular 3/2010, which complements Appendix IX of Bank of Spain Circular 4/2004. This means that additional regulatory corrective factors ranging from 30% to 50%, based on the type of asset, have been applied to the updated appraisal values.
After applying said corrective factors, the excess value above the guarantee value, which represents the amount to be provisioned, amounted to €1,725 and €991 million for nonperforming assets and substandard assets, respectively as of December 31, 2011 (€1,355 million and€1,185 million as of December 31, 2010).
In addition, as of December 31, 2011 and 2010, specific recognized provisions are available, amounting to€1,441 and€1,224 million, respectively.
As of December 31, 2011 and 2010, the updated appraisal values, without the application of said corrective factors, rose to €19,288 and €25,327 million, respectively (an average LTV of 73.4% and 65.5%, respectively) which broadly covers the amount of the debt.
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The following is a description of the real estate credit risk based on the types of associated guarantees:
Credit: Gross amount (Business in Spain)
Without secured loan
With secured loan
Terminated buildings
Homes
Buildings under construction
Land
Urbanized land
Rest of land
With others secured
As of December 31, 2011, 66% of loans to developers are guaranteed with buildings (94% are homes), and only 26% by land, of which 65% is urbanized.
The information on the retail mortgage portfolio risk as of December 31, 2011 and 2010 is as follows:
Housing-acquisition loans to households (Business in Spain)
With secured loan (gross amount)
of which: Impaired loans
The loan to value (LTV) ratio (resulting from dividing the pending risk at any particular date by the amount of the latest available appraisal) of the above portfolio is as follows:
LTV Breakdown of secured loans tohouseholds for the purchase of ahome (Business in Spain)
Gross amount
Outstanding home mortgage loans as of December 31, 2011 and 2010 had an average LTV of 50% and 51% respectively.
As of December 31, 2011, the Bank also had a balance of€968 million in non-mortgage loans for the purchase of housing (of which€64 million were NPA).
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The breakdown of foreclosed, acquired, purchased or exchanged assets from debt from loans relating to business in Spain, as well as the holdings and financing to non-consolidated companies holding such assets is as follows:
Information about assets received in payment ofdebts (Business in Spain)
Real estate assets from loans to the construction and real estate development sectors in Spain.
Real estate assets from mortgage financing for households for the purchase of a home
Rest of foreclosed real estate assets
Equity instruments, investments and financing to non-consolidated companies holding said assets
As of December 31, 2011 and 2010, the gross book value of the Group’s real-estate assets from corporate financing of real estate construction and development was €5,101 million and€3,259 million, respectively, with an average coverage ratio of 34% and 32%, respectively.
The gross book value of real-estate assets from mortgage lending to households for home purchase as of December 31, 2011 and 2010, amounted to€1,509 million and€875 million, respectively, with an average coverage ratio of 27% and 22%, respectively.
As of December 31, 2011 and 2010, the gross book value of the BBVA Group’s total real-estate assets (business in Spain), including other real-estate assets received as debt payment, was €7,013 million and €4,338 million, respectively. The coverage ratio was 33% and 30%, respectively.
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Adjusted acquisition cost
The acquisition cost of the securities less accumulated amortizations, plus interest accrued, but not net of any other valuation adjustments.
Amortized cost
The amortized cost of a financial asset is the amount at which it was measured at initial recognition minus principal repayments, plus or minus, as warranted, the cumulative amount taken to profit or loss using the effective interest rate method of any difference between the initial amount and the maturity amount, and minus any reduction for impairment or change in measured value.
Companies in which the Group has a significant influence, without having control. Significant influence is deemed to exist when the Group owns 20% or more of the voting rights of an investee directly or indirectly.
Available-for-sale (AFS) financial assets are debt securities that are not classified as held-to-maturity investments or as financial assets designated at fair value through profit or loss (FVTPL) and equity instruments that are not subsidiaries, associates or jointly controlled entities and have not been designated as at FVTPL.
Calculated by dividing profit or loss attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period
Business combination
A business combination is a transaction, or any other event, through which a single entity obtains the control of one or more businesses
Cash flow hedges
Those that hedge the exposure to variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction and could effect profit or loss.
Commissions and fees
Income and expenses relating to commissions and similar fees are recognized in the consolidated income statement using criteria that vary according to their nature. The most significant income and expense items in this connection are:
Fees and commissions relating linked to financial assets and liabilities measured at fair value through profit or loss, which are recognized when collected.
Fees and commissions arising from transactions or services that are provided over a period of time, which are recognized over the life of these transactions or services.
Fees and commissions generated by a single act are accrued upon execution of that act.
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Contingencies
Current obligations of the entity arising as a result of past events whose existence depends on the occurrence or non-occurrence of one or more future events independent of the will of the entity.
Possible obligations of the entity that arise from past events and whose existence depends on the occurrence or non-occurrence of one or more future events independent of the entity’s will and that could lead to the recognition of financial assets.
Transactions through which the entity guarantees commitments assumed by third parties in respect of financial guarantees granted or other types of contracts.
Correlation risk
Correlation risk is related to derivatives whose final value depends on the performance of more than one underlying asset (primarily, stock baskets) and indicates the existing variability in the correlations between each pair of assets.
Current service cost is the increase in the present value of a defined benefit obligation resulting from employee service in the current period.
Current tax assets
Taxes recoverable over the next twelve months.
Current tax liabilities
Corporate income tax payable on taxable profit for the year and other taxes payable in the next twelve months.
Obligations and other interest-bearing securities that create or evidence a debt on the part of their issuer, including debt securities issued for trading among an open group of investors, that accrue interest, implied or explicit, whose rate, fixed or benchmarked to other rates, is established contractually, and take the form of securities or book-entries, irrespective of the issuer.
Deferred tax assets
Taxes recoverable in future years, including loss carryforwards or tax credits for deductions and tax rebates pending application.
Deferred tax liabilities
Income taxes payable in subsequent years.
Defined benefit plans.
Defined contribution plans are retirement benefit plans under which amounts to be paid as retirement benefits are determined by contributions to a fund together with investment earnings thereon. The employer’s obligations in respect of its employees current and prior years’ employment service are discharged by contributions to the fund.
Defined contribution plans
Post-employment obligation under which the entity, directly or indirectly via the plan, retains the contractual or implicit obligation to pay remuneration directly to employees when
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required or to pay additional amounts if the insurer, or other entity required to pay, does not cover all the benefits relating to the services rendered by the employees when insurance policies do not cover all of the corresponding post-employees benefits.
Deposits of all classes, including loans and money market operations, received from the Bank of Spain and other central banks.
Deposits of all classes, including loans and money market operations received, from credit entities.
Redeemable cash balances received by the entity, with the exception of debt certificates, money market operations through counterparties and subordinated liabilities, that are not received from either central banks or credit entities. This category also includes cash deposits and consignments received that can be readily withdrawn.
This calculation is similar to that used to measure basic earnings per share, except that the weighted average number of shares outstanding is adjusted to reflect the potential dilutive effect of any stock options, warrants and convertible debt instruments outstanding the year. For the purpose of calculating diluted earnings per share, an entity shall assume the exercise of dilutive warrants of the entity. The assumed proceeds from these instruments shall be regarded as having been received from the issue of ordinary shares at the average market price of ordinary shares during the period. The difference between the number of ordinary shares issued and the number of ordinary shares that would have been issued at the average market price of ordinary shares during the period shall be treated as an issue of ordinary shares for no consideration. Such shares are dilutive and are added to the number of ordinary shares outstanding in the calculation of diluted earnings per share.
Employees that no longer render their services to the entity but which, without being legally retired, remain entitled to make economic claims on the entity until they formally retire.
Economic capital
Eligible capital for regulatory capital adequacy calculations.
Effective interest rate
Discount rate that exactly equals the value of a financial instrument with the cash flows estimated over the expected life of the instrument based on its contractual period as well as its anticipated amortization, but without taking the future losses of credit risk into consideration.
Employee expenses
All compensation accrued during the year in respect of personnel on the payroll, under permanent or temporary contracts, irrespective of their jobs or functions, irrespective of
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the concept, including the current costs of servicing pension plans, own share based compensation schemes and capitalized personnel expenses. Amounts reimbursed by the state Social Security or other welfare entities in respect of employee illness are deducted from personnel expenses.
The residual interest in an entity’s assets after deducting its liabilities. It includes owner or venturer contributions to the entity, at incorporation and subsequently, unless they meet the definition of liabilities, and accumulated net profits or losses, fair value adjustments affecting equity and, if warranted, minority interests.
An equity instrument that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Equity method
The method used for the consolidation of the Group’s holdings in associates. These holdings are recognized at cost on the purchase date and later evaluated. This amount will then be increased or decreased based on the differences that, after said date, the equity of the entity experiences and that corresponds to the investing institution, after considering the dividends received from them and other equity eliminations. The income statement of the investing institution shall include the corresponding proportion in the earnings of the investee.
Exchange/translation differences
Exchange differences (PyL): Includes the earnings obtained in currency trading and the differences arising on translating monetary items denominated in foreign currency to the functional currency. Exchange differences (valuation adjustments): those recorded due to the translation of the financial statements in foreign currency to the functional currency of the Group and others recorded against equity.
Fair value
The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Fair value hedges
Derivatives that hedge the exposure to changes in the fair value of assets and liabilities or firm commitments that have not be recognized, or of an identified portion of said assets, liabilities or firm commitments, attributable to a specific risk, provided it could affect the income statement.
Fees
See Commissions, fees and similar items
Contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs when a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument, irrespective of its instrumentation. These guarantees may take the form of deposits, technical or financial guarantees, insurance contracts or credit derivatives.
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Financial instrument
A financial instrument is any contract that gives rise to a financial asset of one entity and to a financial liability or equity instrument of another entity.
Financial liabilities that do not meet the definition of financial liabilities designated at fair value through profit or loss and arise from the financial entities’ ordinary activities to capture funds, regardless of their instrumentation or maturity.
Full consolidation method
Method used for the consolidation of the accounts of the Group’s subsidiaries. The assets and liabilities of the Group entities are incorporated line-by-line on the consolidate balance sheets, after conciliation and the elimination in full of intragroup balances, including amounts payable and receivable.
Group entity income statement income and expense headings are similarly combined line by line into the consolidated income statement, having made the following consolidation eliminations: a) income and expenses in respect of intragroup transactions are eliminated in full. b) profits and losses resulting from intragroup transactions are similarly eliminated
The carrying amount of the parent’s investment and the parent’s share of equity in each subsidiary are eliminated.
Gains or losses on financial assets and liabilities, net
This heading reflects fair value changes in financial instruments – except for changes attributable to accrued interest upon application of the interest rate method and asset impairment losses (net) recognized in the income statement – as well as gains or losses generated by their sale – except for gains or losses generated by the disposal of investments in subsidiaries, jointly controlled entities and associates an of securities classified as held to maturity.
Goodwill acquired in a business combination represents a payment made by the acquirer in anticipation of future economic benefits from assets that are not able to be individually identified and separately recognized.
Foreign currency hedge of a net investment in a foreign operation.
Derivatives designated as hedging instruments in an accounting hedge. The fair value or future cash flows of those derivatives is expected to offset the differences in the fair value or cash flows of the items hedged.
Held-to-maturity investments are financial assets traded on an active market, with fixed maturity and fixed or determinable payments and cash flows that an entity has the positive intention and financial ability to hold to maturity.
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Held for trading (assets and liabilities)
Financial assets and liabilities acquired or incurred primarily for the purpose of profiting from variations in their prices in the short term.
This category also includes financial derivatives not qualifying for hedge accounting, and in the case of borrowed securities, financial liabilities originated by the firm sale of financial assets acquired under repurchase agreements or received on loan (“short positions”).
Impaired/doubtful/non-performing portfolio
Financial assets whose carrying amount is higher than their recoverable value, prompting the entity to recognize the corresponding impairment loss
Impaired financial assets
A financial asset is deemed impaired, and accordingly restated to fair value, when there is objective evidence of impairment as a result of one or more events that give rise to:
A measurable decrease in the estimated future cash flows since the initial recognition of those assets in the case of debt instruments (loans and receivables and debt securities).
A significant or prolonged drop in fair value below cost in the case of equity instruments.
Income from equity instruments
Dividends and income on equity instruments collected or announced during the year corresponding to profits generated by investees after the ownership interest is acquired. Income is recognized gross, i.e., without deducting any withholdings made, if any.
Insurance contracts linked to pensions
The fair value of insurance contracts written to cover pension commitments.
Assets, other than financial instruments, under production, construction or development, held for sale during the normal course of business, or to be consumed in the production process or during the rendering of services. Inventories include land and other properties held for sale at the real estate development business.
Investment property is property (land or a building – or part of a building – or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for own use or sale in the ordinary course of business.
Companies that form a joint business and, consequently, over which the Group exercises joint control. A joint business is a contractual agreement by virtue of which two or more entities undertake an economic activity under joint control; that is, a contractual agreement to share the power to guide the financial
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and operation policies of an entity or other economic activity, so as to benefit from its operations, and in which the unanimous consent of all participants is required in all financial and operational strategic decision-making.
Leases
A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time, a stream of cash flows that is essentially equivalent to the combination of principal and interest payments under a loan agreement.
A lease is classified as a finance lease when it substantially transfers all the risks and rewards incidental to ownership of the asset forming the subject-matter of the contract.
A lease will be classified as operating lease when it is not a financial lease.
Liabilities associated with non-current assets held for sale
The balance of liabilities directly associated with assets classified as non-current assets held for sale, including those recognized under liabilities in the entity’s balance sheet at the balance sheet date corresponding to discontinued operations.
Liabilities under insurance contracts
The technical reserves of direct insurance and inward reinsurance recorded by the consolidated entities to cover claims arising from insurance contracts in force at period-end.
Loans and receivables, irrespective of their type, granted to third parties that are not credit entities.
Financial instruments with determined or determinable cash flows and in which the entire payment made by the entity will be recovered, except for reasons attributable to the solvency of the debtor. This category includes both the investments from the typical lending activity (amounts of cash available and pending maturity by customers as a loan or deposits lent to other entities, and unlisted debt certificates), as well as debts contracted by the purchasers of goods, or users of services, that form part of the entity’s business. It also includes all finance lease arrangements in which the consolidated subsidiaries act as lessors.
Minority interests
The net amount of the profit or loss and net assets of a subsidiary attributable to associates outside the group (that is, the amount that is not owned, directly or indirectly, by the parent), including that amount in the corresponding part of the consolidated earnings for the period.
Mortgage-covered bonds
Financial asset or security created from mortgage loans and backed by the guarantee of the mortgage loan portfolio of the entity.
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A non-current asset or disposal group, whose carrying amount is expected to be realized through a sale transaction, rather than through continuing use, and which meets the following requirements:
it is immediately available for sale in its present condition at the balance sheet date, i.e. only normal procedures are required for the sale of the asset.
the sale is considered highly probable.
Non-monetary assets
Assets and liabilities that do not provide any right to receive or deliver a determined or determinable amount of monetary units, such as tangible and intangible assets, goodwill and ordinary shares subordinate to all other classes of capital instruments.
NPA Coveraged ratio
Impairment allowances (generic, specific and country risk allowance) as a percentage of the non performing assets (the sum of Substandard loans and advances to customers and Substandard contingent liabilities to customers)
Represents the sum of Substandard loans and advances to customers and Substandard contingent liabilities to customers divided by the sum of Loans and advances to customers and Contingent liabilities to customers.
This heading reflects the increase in equity resulting from various forms of owner contributions, retained earnings, restatements of the financial statements and valuation adjustments.
Other financial assets/liabilities at fair value through profit or loss
Instruments designated by the entity from the start at fair value with changes in profit or loss. Only the following can be included in the category: assets and liabilities that are deemed “hybrid financial assets and liabilities” and for which the fair value of the embedded derivatives cannot be reliably determined.
These are financial assets managed jointly with “Liabilities under insurance contracts” valued at fair value, in combination with derivatives written with a view to significantly mitigating exposure to changes in these contracts’ fair value, or in combination with financial liabilities and derivatives designed to significantly reduce global exposure to interest rate risk.
These headings also include customer loans and deposits effected via so-called “unit-link” life insurance contracts, in which the policyholder assumes the investment risk.
Own/treasury shares
The amount of own equity instruments held by the entity.
Past service cost
It is the change in the present value of the defined benefit obligation for employee service in prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits.
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Retirement benefit plans are arrangements whereby an enterprise provides benefits for its employees on or after termination of service.
Property, plant and equipment/tangible assets
Buildings, land, fixtures, vehicles, computer equipment and other facilities owned by the entity or acquired under finance leases.
Proportionate consolidation method
Method used for the integration of the accounts of the jointly-controlled entities in the Consolidated Financial Statements. The aggregation of the different headings of the balance sheet and income statement of the entities to the consolidated financial statements through this method is performed in the proportion of the Group’s holding in its capital, excluding the portion corresponding to its own equity instruments. In the same proportion, reciprocal credit and debits will be eliminated, as will be the income, expenses and earnings from internal transactions.
Provisions
Provisions include amounts recognized to cover the Group’s current obligations arising as a result of past events, certain in terms of nature but uncertain in terms of amount and/or cancellation date.
Provisions for contingent liabilities and commitments
Provisions recorded to cover exposures arising as a result of transactions through which the entity guarantees commitments assumed by third parties in respect of financial guarantees granted or other types of contracts, and provisions for contingent commitments, i.e., irrevocable commitments which may arise upon recognition of financial assets.
Provision for credit losses
Provisions recognized during the year, net of recoveries on amounts provisioned in prior years, with the exception of provisions for pensions and contributions to pension funds which constitute current or interest expense.
Provisions for pensions and similar obligation
Constitutes all provisions recognized to cover retirement benefits, including commitments assumed vis-à-vis beneficiaries of early retirement and analogous schemes.
Public-covered bonds
Financial asset or security created from public loans and backed by the guarantee of the public debt portfolio of the entity.
Accumulated net profits or losses recognized in the income statement in prior years and retained in equity upon distribution. Reserves also include the cumulative effect of adjustments recognized directly in equity as a result of costs in the issue or reduction of own equity instruments, sale of own equity instruments, actuarial gains on pension plans and the retroactive restatement of the financial statements due to changes in accounting policy and the correction of errors
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Securitization fund
A fund that is configured as a separate equity and administered by a management company. An entity that would like funding sells certain assets to the securitization fund, which, in turn, issues securities backed by said assets.
The amount paid in by owners for issued equity at a premium to the shares’ nominal value.
Financial liabilities arising as a result of the final sale of financial assets acquired under repurchase agreements or received on loan.
Financing received, regardless of its instrumentation, which ranks after the common creditors in the event of a liquidation.
Subsidiaries
Companies over which the Group exercises control. An entity is presumed to have control over another when it possesses the right to oversee its financial and operational policies, through a legal, statutory or contractual procedure, in order to obtain benefits from its economic activities. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of an entity’s voting power, unless, exceptionally, it can be clearly demonstrated that ownership of more than one half of an entity’s voting rights does not constitute control of it. Control also exists when the parent owns half or less of the voting power of an entity when there is:
an agreement that gives the parent the right to control the votes of other shareholders;
power to govern the financial and operating policies of the entity under a statute or an agreement; power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the entity is by that board or body;
power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body.
Substandard risk
All debt instruments and contingent risks which do not meet the criteria to be classified individually as non-performing or written-off, but show weaknesses that may entail for the entity the need to assume losses greater than the hedges for impairment of risks subject to special monitoring.
Stockholders’ funds
Contributions by stockholders, accumulated earnings recognized in the income statement and the equity components of compound financial instruments.
Structured credit products
Special financial instrument backed by other instruments building a subordination structure
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Tax liabilities
All tax related liabilities except for provisions for taxes.
The fair value in favor (assets) or again (liabilities) of the entity of derivatives not designated as accounting hedges.
Unit-link
This is life insurance in which the policyholder assumes the risk. In these policies, the funds for the technical insurance provisions are invested in the name of and on behalf of the policyholder in shares of Collective Investment Institutions and other financial assets chosen by the policyholder, who bears the investment risk.
Value at Risk (VaR)
Value at Risk (VaR) is the basic variable for measuring and controlling the Group’s market risk. This risk metric estimates the maximum loss that may occur in a portfolio’s market positions for a particular time horizon and given confidence level
VaR figures are estimated following two methodologies:
VaR without smoothing, which awards equal weight to the daily information for the immediately preceding last two years. This is currently the official methodology for measuring market risks vis-à-vis limits compliance of the risk.
VaR with smoothing, which weights more recent market information more heavily. This is a metric which supplements the previous one.
VaR with smoothing adapts itself more swiftly to the changes in financial market conditions, whereas VaR without smoothing is, in general, a more stable metric that will tend to exceed VaR with smoothing when the markets show less volatile trends, while it will tend to be lower when they present upturns in uncertainty.
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Following are the consolidated balance sheets and consolidated statements of income of the Group under the IFRS reformatted to conform to the presentation guidelines for bank holding companies set forth in Regulation S-X of the Securities and Exchange Commission of the United States of America.
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 disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
BANCO BILBAO VIZCAYA ARGENTARIA GROUP
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2011, 2010 AND 2009
Cash and due from banks
Interest bearing deposits in other banks
Securities purchased under agreements to resell
Trading securities
Investment securities
Net Loans & Leases
Loans and leases net of unearned income
Less: Allowance for loan losses
Hedging Derivatives
Premises and equipment, net
Investments in affiliated companies
Accrual Accounts
Demand Deposits
Saving deposits
Due to Bank of Spain
Trading account liabilities
Short term borrowings
Long-term debt
Taxes payable
Accounts payable
Accrual accounts
Pension allowance
Others liabilities
Total liabilities
Shareholder´s equity
Common stocks
Additional paid-in capital
Other capital instruments
Retained earnings
Total Shareholder´s equity
Total liabilities and equity
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CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
Interest Income
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 gains (losses)
Total non-interest income
Non-interest expense
Salaries and employee benefits
Occupancy expense of premises, depreciation and maintenance, net
Impairment of goodwill
Net provision for specific allowances
Total non-interest expense
Income Before Taxes
Income Tax expense
Net income attributed to the non-controlling interests
NET INCOME ATTRIBUTED TO PARENT COMPANY
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Financial Statements of Issuers of Guaranteed Securities
In connection with Rule 3-10 (Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered) of Regulation S-X:
BBVA International Preferred, S.A. (Unipersonal) – an issuer of registered preferred securities guaranteed by the Bank – does not file the financial statements required for a registrant by Regulation S-X as it is a 100% owned finance subsidiary of the Bank and the Bank fully and unconditionally guarantees its preferred securities (Serie “C” is listed in the United States). No other subsidiary of the Bank guarantees such securities.
BBVA U.S Senior S.A. (Unipersonal) and BBVA Subordinated Capital, S.A. (Unipersonal) do not file the financial statements required for a registrant by Regulation S-X as these companies are 100% owned finance subsidiaries of the Bank and the Bank will fully and unconditionally guarantee any future securities issued by any of such companies. No other subsidiary of the Bank will guarantee any such securities.
We are not aware of any legal or economic restrictions on the ability of these subsidiaries to transfer funds to the Bank in the form of cash dividends, loans or advances, capital repatriation or otherwise. There is no assurance that in the future such restrictions will not be adopted.
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