1. The NPL ratio stood at 3.3% in September 30, 2024, remaining stable in the quarter and with an improvement of -9 basis points compared to the year-end 2023. In the breakdown by business area, the positive dynamics shown in the quarter by Spain, Rest of Business and South America, contrast with the upward evolution of the indicators in Turkey and Mexico.
2. The NPL coverage ratio ended the quarter at 75%, -15 basis points below the previous quarter, with decreases in Turkey, Rest of Business, South America, and increases in Spain and Mexico.
3. The cumulative cost of risk as of September 30, 2024 stood at 1.42%, remaining stable compared to the previous quarter, and in line with the expectations. By business areas, Spain remains at levels of the previous quarter, South America and Rest of Business presented improvements in their indicators, Turkey continued with his evolution towards more normalized levels and Mexico has been affected by the downward revision of macroeconomic forecasts.

⁽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 September 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 insurance in each geographical area being 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 nine months of 2024 and stood at 150% as of September 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 180% in BBVA, S.A., 154% in Mexico and 167% in Turkey). Without considering this restriction, the Group's LCR ratio was 184%.
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 130% as of September 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 nine months 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 nine months of the year as a result of the strong dynamism of credit and the seasonal nature of fund gathering, which takes place mainly on the fourth quarter. Despite that, the cost of funds has been efficiently managed.
3. In Turkey, in the first nine months of 2024, the lending gap in local currency grew slightly, with loan growth outpacing deposits (however, the performance by quarter has been very different, with an increase in the gap in the first quarter and third quarters, and a reduction in the second one). Regarding the credit gap in foreign currency, an increase was recorded in the first nine months of 2024, mainly originated by an increase in loans. The liquidity buffer has been reduced, mainly due to the increase in the currency gap and the reserve requirement. 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 in Argentine pesos slowed, thanks to the increase loans in the quarter, which has equaled the growth of deposits, highlighting the strong increase in US dollar deposits. In BBVA Colombia, the credit gap decreased in the first nine months of the year with a growth in deposits much higher than loans. BBVA Peru has shown a decrease in lending gap in the first nine months of 2024 with a growth in deposits higher than loans.

The main wholesale financing transactions carried out by the BBVA Group during the first nine months 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. In addition, in September 2024, BBVA Mexico carried out a debt issue of USD 600m on international market for a term of five years and a fixed rate of 5.25%. Lastly, in October, BBVA Mexico issued local bonds for 15.98 billion Mexican pesos in three tranches, one of them for USD 200m. The high participation and diversification achieved reaffirms the confidence and interest of investors in BBVA Mexico.

In Turkey, Garanti BBVA issued in February 2024, Tier 2 ten-year bonds for an amount of USD 500m, with a coupon of 8.375% and an early redemption option in five 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+2.50%) and €179m (Euribor+2.25%), respectively.

For its part, BBVA Peru issued in March, 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 in July 2024, the launch of a green biodiversity bond for an amount of up to USD 70m and a term of three years. By the end of September, two tranches had already been issued for USD 35m.

BBVA Argentina issued in September, in the local market, 24.5 billion Argentine pesos (equivalent to about €23m) in senior debt a variable rate of Badlar+5%. With this issuance BBVA Argentina reopens the debt market in which it has not participated since 2019.

In conclusion, the first nine months of 2024 have become one of the most active wholesale funding issuances in the history of BBVA, S.A., with €9 billion funded in nine tranches. If we also consider the issuance activity of BBVA Mexico, BBVA Turkey and BBVA Peru, this access to international markets increases by USD 2.3 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 nine months 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 14.8% against the euro after the June 2024 presidential elections. Regarding the Chilean peso, the Argentine peso and the Colombian peso registered depreciations of 2.6%, 17.8% and 9.4% respectively, with respect to the euro. As for the Turkish lira, this currency accumulated a depreciation of 14.7% which is much lower than the cost of hedging the currency.

For its part, the USD and the Peruvian sol registered a depreciation of 1.3% and 1.1% respectively, with respect 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 -4 basis points for the Turkish lira¹³. 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, among other factors, 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 nine months of 2024, the actual and expected evolution of inflation, as well as the response of central banks to it, have been the focus of attention of the market. In this sense, expectations regarding the number of rate cuts and the speed of these have been changing throughout the year, with some episodes of volatility, such as the third quarter when weaker than expected economic data in the United States caused the market to adjust its outlook. However, while the ECB began its reduction cycle in June and continued in September, the Federal Reserve did so in September with an initial cut of 50 basis points and an accommodative tone. All this has caused a fall in the yield curves of sovereign bonds in the third quarter, more pronounced in the short tranches which has led to a positive performance in most debt portfolios of the Group. For their part, peripheral rate curve spreads remain well supported. The positive trend observed in the American and European curves also spread to Mexico and South America with significant declines in profitability, especially in the short-term. Turkey, for its part, experienced a certain increase in rates in the quarter, both real and nominal. By geographical areas:

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 remains limited, having been reduced in the last quarters.
   
   On the other hand, the ECB carried out at its September meeting an additional cut to the one carried out in June, by another 25 basis points, placing the reference interest rate at 3.65%, the marginal deposit facility rate at 3.50% and the marginal loan facility rate at 3.90%. Also, at its October meeting, the ECB made an additional cut of 25 basis points in the official interest rates, with effect from the 23 October 2024. Additionally, as announced in March, the ECB reduced in September the spread between the benchmark interest rate and the deposit facility in 15 basis points, and confirmed that it is reducing its 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. Among the assets that are most sensitive to interest rate changes, the commercial portfolio stood out, while consumer and mortgage portfolios 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 10.50% at the end of the first nine months of 2024, 75 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 September 2023 up to 50.0% by the end of September 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, 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 5.25% as of September 2024, 150 basis points below its 2023 closing level while in Colombia, the central bank cut on its October meeting the benchmark interest rate by 50 basis points and set it at 10.25%, accumulating a cut of 275 basis points in 2024. In Argentina, the central bank maintains the benchmark interest rate at 40%, which is a decrease of 60 basis points compared to the end of December 2023.

⁽¹⁾ As announced on 13 March 2024,certain changes to the operational framework for implementing monetary policy will take effect from 18 September 2024.In particular, the spread between the rate on the main refinancing operations and the deposit facility rate was reduced to 15 basis points. The spread between the interest rate on the marginal lending facility and the rate on the main refinancing operations will remain unchanged at 25 basis points.

⁽²⁾ Calculated as the month average.

¹³ This sensitivity does not include the cost of capital hedges, which are currently estimated at 3 basis points per quarter for Mexican peso and 2 basic points per quarter for Turkish lira.

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