Asset/Liability Management

The Assets and Liabilities Management unit is responsible for actively managing structural interest-rate and foreign-exchange positions, as well as the Group’s overall liquidity and shareholders’ funds.

Liquidity management helps to finance the recurrent 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 liquidity management continues to be to encourage the financial independence of its subsidiaries in the Americas. 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. Short-term and long-term wholesale financial markets were affected by heightened uncertainty in 2011, showing mixed performances. It was positive in the first four months of 2011 as a result of an improved risk perception in peripheral European countries and the major progress made in tackling economic matters in Europe. However, it worsened in May and June, due to renewed doubts about the viability of the economies of Greece and Portugal. Finally, in the second half of the year, the long-term markets have remained practically closed to the European financial sector. Short-term markets have been affected by the lack of investor appetite due to the uncertainties regarding the sustainability of European finances. Against this background, BBVA was one of the few European banks with access to the market, as demonstrated by the successful issues during 2011. Thus, over the first quarter, BBVA has not only operated perfectly normally, but was the first bank to move into the liquidity market in January 2011 with a new issue of mortgage-covered bonds and a volume of long-term finance that has amply offset expiring maturities. Over the second quarter, BBVA made a 3-year, $1,600m bond issue on the U.S. market. In the fourth quarter, BBVA was again one of the few entities with access to the market, as demonstrated by the successful issue of €750m senior debt, maturing in 18 months. In this context, the European Central Bank decided at its meeting on December 8 to take exceptional measures to extend the liquidity in the European financial system. These measures included two 36-month liquidity auctions, reducing the reserve ratio from 2% to 1%, and widening collateral eligibility. BBVA used the extraordinary 36-month auction on December 21 to obtain an amount equivalent to its wholesale debt redemptions in 2012. This proves the Bank’s prudence in liquidity risk management, in line with the debt maturity profile for the coming years that can be comfortably met in a scenario of low lending activity in Spain and growth of customer deposits. To summarize, BBVA’s proactive policy in its liquidity management, its retail business model and a smaller volume of assets give it a comparative advantage compared to its European peers.

Moreover, the increased proportion of retail deposits on the liability side of the balance sheet in all the geographical areas continues to allow the Group to strengthen its liquidity position and to improve its financing structure.

The Group’s capital management has a twofold aim: to maintain the levels of capitalization appropriate to the business targets in all the countries in which it operates; and, at the same time, to maximize the return on shareholders’ funds through the efficient allocation of capital to different units, good management of the balance sheet and proportionate use of the various instruments that comprise the Group’s equity: common stock, preferred securities and subordinated debt. In 2011, BBVA’s Annual General Meeting approved the introduction of a “Dividend Option” program to offer shareholders a wider range of remuneration on their capital. In addition, in July 2011 the Board of Directors approved the total conversion of the mandatory convertible subordinated bonds issued in September 2009 (worth €2,000m) into newly issued BBVA ordinary shares. Furthermore, in December 2011, the conversion of preferred shares for mandatory convertible bonds was concluded successfully. These bonds comply with the EBA requirements for their eligibility as highest-quality capital. The final amount was €3,430m, following subscription of 98.7% of preferred share holders. In conclusion, the current levels of capitalization ensure the Bank’s compliance with all of its capital objectives.

Foreign-exchange risk management of BBVA’s long-term investments, basically stemming from its franchises in the Americas, aims to preserve the Group’s capital ratios and ensure the stability of its income statement. In 2011, BBVA maintained a policy of actively hedging its investments in Mexico, Chile, Peru and the dollar area, with aggregate hedging of close to 50%. In addition to this corporate-level hedging, dollar positions are held at a local level by some of the subsidiary banks. The foreign-exchange risk of the earnings expected in the Americas for 2011 is also strictly managed. In 2011, hedging mitigated the negative impact of exchange rates on the capital and the Group’s income statement. For 2012, the same prudent and proactive policy will be pursued in managing the Group’s foreign-exchange risk from the standpoint of its effect on capital ratios and on the income statement.

The unit also actively manages the asset and liability interest-rate risk on the Group’s balance sheet. This aims to maintain a steady growth in net interest income in the short and medium term, regardless of interest-rate fluctuations. In 2011, the results of this management have been very satisfactory, with extremely limited risk strategies in Europe, the United States and Mexico. These strategies are managed both with hedging derivatives (caps, floors, swaps, FRAs) and with balance-sheet instruments (mainly government bonds with the highest credit and liquidity ratings).