BBVA in 2012

Asset/Liability Management

Print this page

The Assets and Liabilities Management unit is responsible for 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 recurring 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 2012, showing mixed performance:

  • Positive performance in the first quarter, as result of both the extraordinary measures adopted by the ECB, including two long-term liquidity auctions, and improved risk perception in European countries.
  • Less favorable performance from April to the summer months, due to doubts regarding the viability of the Spanish economy and the rating downgrades of sovereign debt and financial institutions.
  • Lastly, since the end of August and as a result of new measures adopted by the ECB with the outright monetary transactions (OMT), the long-term funding markets have performed better, enabling top-level financial institutions like BBVA to resort to them on a recurring basis for the issue of both senior debt and covered bonds.

Short-term funding markets have been affected by the lack of investor appetite as a result of the rating downgrades, although the trend improved toward the end of the year, with growth in the volume of amounts gathered.

Against this background, BBVA has been one of the few European banks with access to the market, as demonstrated by the successful issues completed in 2012. Thus, over the first quarter, BBVA operated as usual, with an issue of senior debt for €2,000m. In the third quarter, the Group successfully completed several senior debt deals, with a very significant level of demand. Lastly, in the fourth quarter BBVA successfully completed two senior debt deals in Europe for a total of €2,500m, one senior debt deal in the US market for €2,000m and one 5-year mortgage-covered bond deal for €2,000m, all with a very significant demand. This demonstrates how BBVA is able to access the markets under very successful conditions in terms of price and amount.

The environment outside Europe has also been very constructive. BBVA has successfully completed issues in the Mexican and Peruvian markets, among others, and strengthened its liquidity position in all the areas in which the Group operates.

To sum up, BBVA’s proactive policy in its liquidity management, the growth in customer funds in all geographical areas, its proven ability to access the market in difficult environments, its retail business model, its lower volume of debt redemptions compared with its peers and the relatively small size of its balance sheet, all give it a comparative advantage against 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 strengthen the Group’s liquidity position and to improve its financing structure.

BBVA’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 the various units, good management of the balance sheet and proportionate use of the different instruments that comprise the Group’s equity: common stock, preferred shares and subordinated debt.

The main highlights in 2012 as regards the Group’s capital management are summarized below:

  • In the first quarter of 2012, BBVA’s Annual General Meeting once more approved the “Dividend Option” program, which offers shareholders a wider range of remuneration alternatives for their shares. Two of the four dividends paid out in 2012 have been paid under the “dividend option” system and in both cases the success ratio has been close to 80%. This mechanism also allows the Group to accumulate capital through a higher proportion of retained earnings in the current year.
  • In addition, March 30 marked the beginning of the period for voluntary conversion of the convertible bonds issued in December 2011 as a result of an exchange of the preferred shares held by retail investors. The conversion was taken up by 27.84% of the issue (€3,430m), and as a result 158 million new shares were issued.
  • Subsequently, on June 30, 2012 BBVA carried out a mandatory partial conversion of the outstanding convertible bonds through a reduction of 50% in their nominal value. In order to carry out this conversion, BBVA issued 239 million new shares.
  • The acquisition of Unnim was completed in the third quarter of 2012. This deal has enabled BBVA to double its presence in Catalonia. This acquisition consumed around 10 basis points of core capital. In the fourth quarter there was the tender offer to repurchase 15 issues of preferred securities and subordinated bonds distributed through Unnim’s retail network (T1, UT2 and LT2) at 95% of their nominal value for €490m, in exchange for the Bank’s treasury stock. BBVA has thus offered a solution to Unnim customers and provided them with liquidity. In addition, the deal has protected the interests of BBVA shareholders, since this exchange is not dilutive, and has had a positive impact on the Group’s generation of core capital. BBVA’s offer was accepted by 99.3% of the preferred securities and 82.0% of the subordinated bonds. In exchange, they received 64,229,358 ordinary BBVA shares from its treasury stock. To sum up, the Unnim deal has therefore been practically neutral in terms of capital consumption, as the effect in capital consumption has been offset by the tender offer mentioned above.
  • The Bank also conducted two additional liability management exercises. First, in the second quarter of 2012 BBVA repurchased €638m of securitization bonds and generated €250m of capital gains that have been used to strengthen the Group’s provisions. It also repurchased LT2 subordinated debt, resulting in capital gains of €194m and improving the quality of its capital with only a limited impact on liquidity. These operations have generated capital for BBVA thanks to active and efficient liability management.

Finally, the analysis conducted by Oliver Wyman has confirmed BBVA’s sound capital position that places it in Group 0 (banks with no capital requirements). The EBA has confirmed that BBVA fulfilled its capital recommendations in June, according to the schedule set for this purpose.

In conclusion, the current levels of capitalization enable the Bank to fulfill 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 adequacy ratios and ensure the stability of its income statement. In 2012, 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 2012 is also strictly managed. In 2012, hedging generated negative impacts recognized in Corporate Activities, which have been more than offset by the positive effects that the appreciation of the foreign currencies against the euro has generated in the income statements of the various countries. For 2013, 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 structural interest-rate exposure 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 2012, 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).