1. The NPL ratio decreased with respect to the previous quarter, standing at 3.3% at June 30, 2024, favored by the growth of the portfolio and the evolution of the non-performing loans mentioned above.
2. The NPL coverage ratio ended the quarter at 75%, at similar levels compared to the previous quarter, with decreases in Spain, Turkey, South America, and increases in Mexico and Rest of Business.
3. The cumulative cost of risk as of June 30, 2024 stood at 1.42%, which is above the previous quarter, yet in line with the expectations and associated with the growth in profitable portfolios. By business areas, Spain and South America showed stability, Turkey was at normalized levels and Mexico has been affected by the requirements of the retail portfolios.

⁽¹⁾ Includes gross loans and advances to customers plus guarantees given.

⁽²⁾ The NPL coverage ratio includes the valuation adjustments for credit risk throughout the expected residual life in those financial instruments that have been acquired (mainly originating from the acquisition of Catalunya Banc, S.A.). If these valuation corrections had not been taken into account, the NPL coverage ratio would have stood at 74% as of June 30, 2024.

⁽¹⁾ Preliminary data.

Structural risks

Liquidity and funding

Liquidity and funding management at BBVA promotes the financing of the recurring growth of the banking business at suitable maturities and costs using a wide range of funding sources. BBVA's business model, risk appetite framework and funding strategy are designed to reach a solid funding structure based on stable customer deposits, mainly retail (granular). As a result of this model, deposits have a high degree of assurance in each geographical area, close to 55% in Spain and Mexico. It is important to note that, given the nature of BBVA's business, lending is mainly financed through stable customer funds.

One of the key elements in the BBVA Group's liquidity and funding management is the maintenance of large high-quality liquidity buffers in all geographical areas. In this respect, the Group has maintained during the last 12 months an average volume of high-quality liquid assets (HQLA) of €132.7 billion, of which 97% corresponded to maximum quality assets (level 1 in the liquidity coverage ratio, LCR).

Due to its subsidiary-based management model, BBVA is one of the few major European banks that follows the Multiple Point of Entry (MPE) resolution strategy: the parent company sets the liquidity policies, but the subsidiaries are self-sufficient and responsible for managing their own liquidity and funding (taking deposits or accessing the market with their own rating). This strategy limits the spread of a liquidity crisis among the Group's different areas and ensures the adequate transmission of the cost of liquidity and financing to the price formation process.

The BBVA Group maintains a solid liquidity position in every geographical area in which it operates, with ratios well above the minimum required:

1. The LCR requires banks to maintain a volume of high-quality liquid assets sufficient to withstand liquidity stress for 30 days. BBVA Group's consolidated LCR remained comfortably above 100% during the first half of 2024 and stood at 148% as of June 30, 2024. It should be noted that, given the MPE nature of BBVA, this ratio limits the numerator of the LCR for subsidiaries of BBVA S.A. to 100% of their net outflows, therefore, the resulting ratio is below that of the individual units (the LCR of the main components was 178% in BBVA, S.A., 154% in Mexico and 162% in Turkey). Without considering this restriction, the Group's LCR ratio was 179%.
2. The net stable funding ratio (NSFR) requires banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. The BBVA Group's NSFR ratio stood at 129% as of June 30, 2024.

The breakdown of these ratios in the main geographical areas in which the Group operates is shown below:

In addition to the above, the most relevant aspects related to the main geographical areas are the following:

1. BBVA, S.A. has maintained a strong position with a large high-quality liquidity buffer, having repaid the entire TLTRO III program, maintaining at all times the regulatory liquidity metrics well above the set minimums. During the first half of 2024, commercial activity has been broadly neutral in terms of liquidity, with growth in both customer deposits and lending activity.
2. BBVA Mexico shows a solid liquidity situation, even though the credit gap increased in the first half of the year as a consequence of the outflows of deposits and strong dynamism of credit growth. Despite that, the cost of funds has been efficiently managed.
3. In Turkey, in the first half of 2024, the lending gap in local currency remained stable (however, the performance by quarter has been very different, with an increase in the gap in the first quarter and a reduction in the second one). Regarding the credit gap in foreign currency, an increase was recorded, mainly originated by the outflow of deposits during the fist half of the year due to dedollarization. Liquidity buffer has been reduced, mainly due to the increase in the currency gap and the reserve requirement. Garanti BBVA continues to maintain a stable liquidity position with comfortable ratios. On the other hand, the Central Bank of Turkey has continued updating the measures to continue with the dedollarization process of the economy and control the inflation.
4. In South America, the liquidity situation remains adequate throughout the region. In BBVA Argentina, the growth of excess liquidity slowed thanks to the increase loans in the quarter, which has equaled the growth of deposits. However, in the second half of the year, the growth in deposits exceeded the loans in local currency and with small differences in foreign currency. In BBVA Colombia, the credit gap decreased in the first half of the year with a growth in deposits much higher than loans. BBVA Peru has shown a decrease in lending gap in the first half of 2024 with a growth in deposits higher than loans.

The main wholesale financing transactions carried out by the BBVA Group during the first half of 2024 are listed below:

Additionally, BBVA, S.A. redeemed two capital issuances in the first half of 2024: in February 2024, a Tier 2 issuance of subordinated bonds issued in February 2019, for an amount of €750m and, in March 2024, an AT1 issued in 2019 on its first date of optional redemption, for an amount of €1 billion.

BBVA Mexico issued in January 2024 Tier 2 bonds for USD 900m with a maturity of 15 years and an early repayment option in 10 years with a coupon of 8.125%. Additionally, on April 10 2024, BBVA Mexico issued bank stock certificates for 15 billion Mexican pesos in two tranches. The first one was placed at a term of three and a half years, with a variable TIIE rate (Interbank Equilibrium Interest Rate) for one-day Funding plus 32 basis points, amounting to a total of 8.4 billion Mexican pesos. The second tranche was issued for seven years, with a fixed rate of 10.35%, for a total of 6.6 billion Mexican pesos.

In Turkey, Garanti BBVA issued in February 2024 Tier 2 10-year bonds for an amount of USD 500m, with a coupon of 8.375% and an early redemption option in 5 years. Additionally, in June 2024, Garanti BBVA renewed the total syndicated loan based on environmental, social and governance (ESG) criteria, which consists of two separate tranches of USD 241m (SOFR+2.5%) and €179m (Euribor+2.25%), respectively.

For its part, BBVA Peru issued Tier 2 bonds in the international market for USD 300m, with a 6.20% coupon, a 10.25-year maturity and an early redemption option in the fifth year.

BBVA Colombia, together with the International Finance Corporation (IFC) and the Inter-American Development Bank (IDB) announced the launch of a green biodiversity bond for an amount of up to USD 70m and a term of 3 years. On 12 July 2024, thereunder a first tranche of USD 15m was announced. For more information, see the Sustainability section at the beginning of this report.

In conclusion, the first half of 2024 has turned into one of the historically more actives in terms of issuance of wholesale funding of BBVA, S.A., with €8 billion funded in 8 tranches. If we also consider the issuance activity of BBVA Mexico, BBVA Turkey and BBVA Peru, this access to international markets increases by USD 1.7 billion, which shows the strength of the Group´s access to wholesale markets from its main issuance units.

Foreign exchange

Foreign exchange risk management aims to reduce both the sensitivity of the capital ratios and the net attributable profit variability to currency fluctuations.

The performance of the Group's main currencies during the first half of 2024 has been uneven. Due to its relevance for the Group, it should be noted the evolution of the Mexican peso, which has depreciated 4.3% against the euro due to the results of the June 2024 presidential elections. According to the Chilean peso, the Argentine peso and the Colombian peso registered depreciations of 4.0%, 8.5% and 5.1% respectively, with respect to the euro. Regarding the Turkish lira, this currency accumulates a depreciation of 7.2% which is much lower than the carry-trade of the currency.

The USD and the Peruvian sol registered an appreciation of 3.2% and 0.5% respectively, regards to the euro.

⁽¹⁾ According to IAS 21 "The effects of changes in foreign exchange rates", the year-end exchange rate is used for the conversion of the Turkey and Argentina income statement.

In relation to the hedging of the capital ratios, BBVA covers, in aggregate, 70% of its subsidiaries' capital excess. The sensitivity of the Group's CET1 fully-loaded ratio to 10% depreciations in major currencies is estimated at: +18 basis points for the U.S. dollar, -10 basis points for the Mexican peso and -6 basis points for the Turkish lira¹⁵. With regard to the hedging of results, BBVA hedges between 40% and 50% of the aggregate net attributable profit it expects to generate in the next 12 months. For each currency, the final amount hedged depends on its expected future evolution, the costs and the relevance of the incomes related to the Group's results as a whole.

Interest rate

Interest rate risk management seeks to limit the impact that BBVA may suffer, both in terms of net interest income (short-term) and economic value (long-term), from adverse movements in the interest rate curves in the various currencies in which the Group operates. BBVA carries out this work through an internal procedure, pursuant to the guidelines established by the European Banking Authority (EBA), with the aim of analyzing the potential impact that could derive from a range of scenarios on the Group's different balance sheets.

The model is based on assumptions intended to realistically mimic the behavior of the balance sheet. The assumptions regarding the behavior of accounts with no explicit maturity and prepayment estimates are specially relevant. These assumptions are reviewed and adapted at least once a year according to the evolution in observed behaviors.

At the aggregate level, BBVA continues to have a positive sensitivity toward interest rate increases in the net interest income.

In the first half of 2024, inflation were more persistent than expected. This has caused the market to reduce its interest rate expectations for 2024 in Europe and in the United States and to expect the first rate fall from the Fed towards the fall, while the ECB began its reduction cycle in June. The above, together with some geopolitical uncertainties, has triggered a rise in sovereign bond yields and has led to a negative performance in most debt portfolios of the Group. For their part, peripheral rate curve spreads remain well supported, even slightly narrowing in the first half of the year, although they have suffered some volatility due to the political situation in France. In Mexico, the central bank cut for the first time in three years the official interest rate, in line with the monetary policy actions of most South American countries, where by end-2023 interest rate cuts had begun, which have continued during the first half of 2024. In Turkey, the Central Bank of Turkey has continued the tightening of its monetary policy launched in June 2023.

By area, the main features are:

1. Spain has a balance sheet characterized by a lending portfolio with high proportion of variable-rate loans (mortgages and corporate lending) and liabilities composed mainly by customer demand deposits. The ALCO portfolio acts as a management lever and hedge for the balance sheet, mitigating its sensitivity to interest rate fluctuations. In an environment of high rates, the exposure of the net interest income to movements in balance sheet interest rates has been reduced in the last quarters.
   
   On the other hand, at its June meeting the ECB carried out the first reduction, by 25 basis points, in official interest rates, after nine months in which interest rates had remained unchanged. Thus by the end of June, the reference interest rate stood at 4.25%, the marginal deposit facility rate at 3.75% and the marginal loan facility rate at 4.50%. Additionally, the ECB announced in March the changes on its operative framework, highlighting that, from September on, the spread between the benchmark interest rate and that of the deposit facility will be reduced to 15 basis points, and in June it confirmed that it will reduce holdings of securities acquired under the Pandemic Emergency Purchase Program (PEPP) in the second half of the year, expecting to end reinvestments at the end of 2024.


2. Mexico continues to show a balance between fixed and variable interest rates balances, which results in a limited sensitivity to interest rates fluctuations. In terms of assets that are most sensitive to interest rate changes, the commercial portfolio stood out, while consumer loans and mortgages are mostly at a fixed rate. With regard to customer funds, the high proportion of non-interest bearing deposits, which are insensitive to interest rate movements, should be highlighted. The ALCO portfolio is invested primarily in fixed-rate sovereign bonds with limited maturities. The monetary policy rate stood at 11.00% at the end of the first half of 2024, 25 basis points below the end-of-year level of 2023.


3. In Turkey, the sensitivity of deposits is offset by the ALCO portfolio and loans (fixed rate and relatively short-term). The sensitivity of the net interest income remains very limited thanks to the different efforts carried out by the Bank. The CBRT has recently increased monetary policy rates, taking interest rates from 15.0% by the end of June 2023 to 50.0% by the end of June 2024, unchanged since March 2024.


4. In South America, the interest rate risk profile remains low as most countries in the area have a fixed/variable composition and maturities that are very similar for assets and liabilities, with limited net interest income sensitivity. In addition, the in balance sheets with several currencies, the interest rate risk is managed for each of the currencies, showing a very low level of exposure. Regarding benchmark rates, in Peru it stood at 5.75% as of June 2024, 100 basis points below its 2023 closing level. In Colombia, the interest rate was placed by the end of June 2024 in 11.25%, 175 basis points below the end of 2023. In Argentina, the central bank has made several cuts during the quarter the benchmark interest rate at 40%, which is a decrease of 60 basis points compared to the end of December 2023.

⁽¹⁾ Calculated as the month average.

¹⁵ This sensitivity does not include the cost of capital hedges, which are currently estimated at 3 basis points per quarter for Mexican peso and 1 basic point per quarter for Turkish lira.

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