1. The NPL remained practically stable as of March 31, 2024, standing at 3.4%.
2. The NPL coverage ratio ended the quarter at 76%, steady compared to the previous quarter (86 basis points below the figure of the end of December), with stability in Spain and decreases in the rest of business areas, mainly in Mexico and Rest of Business.
3. The cumulative cost of risk as of March 31, 2024 stood at 1.39%, which is above the previous quarter, yet in line with the expectations, with lower requirements in Spain, more normalized levels in Turkey, South America continuing the trend observed in 2023 and Mexico affected by the requirements of the retail portfolio.

⁽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 76% as of March 31, 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 €132.5 billion, of which 97% correspond 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 quarter and stood at 151% as of March 31, 2024. It should be noted that, given the MPE nature of BBVA, this ratio limits the numerator of the LCR for subsidiaries other than BBVA S.A. to 100% of its net outflows. Therefore, the resulting ratio is below that of the individual units (the LCR of the main components reaches 179% in BBVA, S.A., 165% in Mexico and 193% in Turkey). Without considering this restriction, the Group's LCR ratio reaches 186%.
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 132% as of March 31, 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 quarter of 2024, commercial activity has provided liquidity to the balance sheet mainly due to the good evolution of customer deposits, with growth greater than that of lending activity.
2. BBVA Mexico shows a solid liquidity situation, even though the credit gap increased in the first quarter of the year as a consequence of the outflows of the end-year seasonal fund gathering. Despite that, the cost of funds has been efficiently managed.
3. In Turkey, in the first quarter of 2024, the lending gap in local currency increased, due to a greater growth in loans than in deposits, while the lending gap in foreign currency decreased due to higher demand for foreign currency deposits before the local elections. 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 Argentina, liquidity in the system continues to increase, as well as in BBVA due to a higher growth in deposits than in loans in both local and foreign currency. In BBVA Colombia, the credit gap remains essentially unchanged in the first quarter, after a slight fall of the volume of credit investment, in line with the evolution of customer deposits. BBVA Peru maintains solid liquidity levels.

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

Additionally, BBVA, S.A. redeemed two capital issuances in the first quarter: 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 €1,000m.

BBVA Mexico issued in January Tier 2 bonds for USD 900m with a maturity of 15 years and early repayment option in 10 years with a coupon of 8.125%.

In Turkey, Garanti BBVA issued Tier 2 10-year bonds for an amount of USD 500m, with a coupon of 8.375% and a redemption option in 5 years.

For its part, BBVA Peru issued Tier 2 bonds in the international market for USD 300m, with a 6.20% coupon, a term of 10.25-year maturity and an early redemption option in year 5.

In conclusion, the first quarter of 2024 has turned into one of the historically more actives in terms of issuance of wholesale funding of BBVA, S.A., with €5,400m funded in 5 tranches. If we also consider the issuance activity of BBVA Mexico, BBVA Turkey and BBVA Peru, this access to international markets increases by USD 1,700m, which shows the strength of the Group´s access to wholesale markets from its main issuance units.

Additionally, on April 10th, BBVA Mexico issued senior bank bonds for 15,000m Mexican pesos, in two tranches. The first one was placed with a term of three and a half years, with a variable TIIE anchoring rate of one day plus 32 basis points, registering a total of 8,439m Mexican pesos. The second tranche was issued to seven years, with a fixed 10.35% rate, for a total of 6,561m Mexican pesos.

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 quarter of 2024 has been very uneven. Due to its relevance for the Group, it should be noted the strength of the Mexican peso, which has appreciated 4.5% against the euro. In the same way, the US dollar and the Peruvian sol registered an appreciation of 2.2% against the euro and, in the case of the Colombian peso, this appreciation was slightly smaller, of 1.7%. On the downside, the depreciation of the Chilean peso (-7.9%), of the Turkish lira (-6.6%) and, to a lesser extent, of the Argentinian peso (-3.7%) stand out.

⁽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: +17 basis points for the U.S. dollar, -10 basis points for the Mexican peso and -4 basis points for the Turkish lira⁹. 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 quarter of 2024, inflation data were slightly surprisingly high. This has caused the market to anticipate smaller rate drops for the year in Europe and in the United States and to expect the first rate fall from the Fed by the end of the summer, which has triggered a rise in sovereign bond profitability and has led to a slightly negative performance in most debt portfolios of the Group. For their part, peripheral rate curve spreads remain well supported, even tightening in the quarter. 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. 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, currently close to their market-predicted terminal rates, the interest rate risk profile of the balance sheet has been reduced in the last quarters.
   
   On the other hand, the ECB left rates unchanged in the first quarter of the year, bringing the benchmark interest rate by the end of March to 4.5%, the marginal deposit facility rate at 4.0% and the marginal loan facility rate at 4.75%. 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. Finally, the market expectations on the start of rate falls by mid-2024 has continued, which has led to the benchmark Euribor types to remain fundamentally stable during the first quarter.


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%, 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 8.5% by the end of March 2023 to 50% by the end of March 2024. Linked to regulatory measures, the central bank has also started to remunerate some reserves in Turkish lira.


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, the cut cycle has begun in the region. In Peru it stood at 6.25% as of March 2024, 50 basis points below its 2023 closing level. In Colombia, the interest rate was placed by the end of March 2024 in 12.25%, 75 basis points below the end of 2023. In Argentina, the central bank unexpectedly cut in March the benchmark interest rate to 80%, making another cut of 10 basis points in April up to 70%, which is a decrease of 30 basis points from 100% as of December 2023.

⁽¹⁾ Calculated as the month average.

⁹ This sensitivity does not include the cost of capital hedges, which are currently estimated at 3 basis points per quarter for Mexican peso and 3 basis points per quarter for Turkish lira.

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